WELCOME TO THE NEIGHBORHOOD! WALL STREET DESIGNED IT / THE WALL STREET JOURNAL

Welcome to the Neighborhood! Wall Street Designed It

Big residential property investors are finding it harder to buy in good neighborhoods, so they are building new ones

By Carol Ryan

Rent growth is stronger for single-family homes than for apartments. PHOTO: JOE RAEDLE/GETTY IMAGES

Your new suburban rental has granite kitchen countertops, built to withstand even the most hard-wearing tenant. 

The neighbors next door have the exact same laundry machine. 

Welcome to the community where every detail has been designed to keep costs down for the Wall Street landlord.

Big investors are bullish about America’s family homes. 

So bullish they are willing to build entire new neighborhoods as it becomes harder to buy houses from the usual channels. 

Interest rates are at multiyear highs and fewer homes are for sale as owners don’t want to give up their cheap mortgage rates. 

Homes are also eye-wateringly expensive. 

In October, prices hit a fresh record according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. 

Wall Street investors in housing can’t meet their return hurdles when both homes and debt are this costly. 

During the third quarter of 2023, big landlords that own anywhere from 100 to more than 1,000 housing units purchased just 1% of all the homes sold in the U.S. 

This is down from roughly 3% throughout 2022, according to data from John Burns Research and Consulting. 

America’s rental market remains dominated by mom-and-pop landlords, who buy nearly one-in-five of all the U.S. family homes that come up for sale. 

But institutional investors want a bigger slice of the action. 

They already own 55% of all U.S. apartment units but see family homes as a more attractive bet. 

Rent growth is stronger for single-family homes than for apartments, and tenants tend to stick around for longer, especially if their children are attending local schools. 

On average, renters in single-family homes stay in their properties over four years, compared with two to three for apartment dwellers. 

But the strategy that powerful investors such as Blackstone used to amass tens of thousands of family homes since the 2008 financial crisis is running out of steam. 

Picking off individual houses dotted around the country is time consuming, expensive and inefficient. 

“The scattered sites model has run its course. 

It worked when lots of houses were in foreclosure but it’s not the future of the industry,” says Brad Case, chief economist for Middleburg Communities. 

It is also harder for Wall Street players to get their hands on newly built houses in bulk these days. 

When the market is weak, home builders sometimes opt to unload finished houses to institutional investors at a roughly 10% discount if they need to wrap up a development. 

But this isn’t happening now. 

There is so little housing inventory available to buy that newly constructed homes are being snapped up immediately by regular buyers.  

Increasingly, Wall Street’s solution is to build new neighborhoods of family homes where everybody rents. 

The model isn’t completely new: Clustered housing for students and senior citizens has been around for decades. 

The number of “build-to-rent” communities is still small, with 900 neighborhoods nationwide, each with an average of 135 to 150 homes according to a report by the Urban Institute. 

But the concept is growing fast. 

The National Association of Home Builders estimates that roughly 10% of new housing construction is destined for build-to-rent. 

It is efficient for big investors to pool all of their rental homes in one place rather than have them scattered all over a city. 

Fixing broken appliances, for instance, is cheaper when the handyman doesn’t have to drive miles across town between properties. 

And landlords are discovering new ways to keep a lid on costs when they can design whole neighborhoods from the ground up. 

A family home built by institutional investors will usually have a wide hallway and stairs to protect the paintwork from knocks and bumps when multiple tenants haul furniture in and out. 

The homes are sturdily built, with hard-wearing countertops and flooring that will last for years. 

High-quality fittings attract tenants, but also lower the landlord’s maintenance bills over time. 

Investors that can build new housing themselves will find it easier to grow their portfolios profitably in the coming years. 

New York-listed real-estate investment trust American Homes 4 Rent is currently constructing over 2,000 new family homes. 

Competitors such as Invitation Homes have opted for partnerships with housebuilders, however these arrangements are more expensive as the builder must get a cut. 

Still, both stocks, which specialize in family homes, should continue to outperform struggling apartment REITs like Equity Residential. 

Regular house hunters won’t be sorry to hear that fewer deep-pocketed investors may be bidding for America’s scarce family homes in the future. 

And any new stock that landlords build is welcome—depending on whom you ask, America is short anywhere from 2 million to 4 million homes. 

The only downside might be a lack of charm in these new, rationalized neighborhoods.