Will REO-rentals Really Compete With Apartment Building Investments?

Greg Willett, VP of research over at Real Page wrote a nice piece on that which covers it nicely; take it away Greg:

Will REO rentals compete with Apartment Building Investments?

Thanks to one sentence uttered by Warren Buffett and some major overplay by the media, single-family rentals are a hot investment choice now.  Thus, the analysts at MPF Research are fielding a constant stream of inquiries about whether the bulk sale of bank-owned single-family homes to investors who will operate them as rentals will impact the apartment sector.

Our take is that the world hasn’t changed much.

While apartments and for-lease single-family homes are both rental product types, they by and large appeal to different audiences. Urban core apartments feature mostly small units suitable for single-person households and childless couples who live in them in part for lifestyle reasons. Those apartment residents aren’t in the suburbs – where single-family rentals are clustered – by choice, and finances often don’t have anything to do with those decisions.

Once you get to the suburbs, there’s more overlap in the target customers for apartments and single-family rentals, but even there the number of common prospects isn’t especially large. Suburban single-person households for the most part still prefer apartments. Many households with children present opt for single-family rentals, but that’s not something that qualifies as any sort of shift in the marketplace. For-lease single-family homes always have been available to serve this segment of households in pretty large volumes across most suburban locations.

Childless couples living in the suburbs, then, form the key group that on the surface looks attractive to both apartment and single-family rental operators. Those customers aren’t completely insignificant to the apartment market’s overall health, but they also don’t play such a large role that losing some of them to single-family rentals would do much damage in the big picture.

Furthermore, when talking about the potential impact of homes coming out of foreclosure and into the rental pool, there are just a handful of metros where the flow could reach a magnitude likely to even be noticeable by apartment owners and managers. Right now, the only spots where MPF Research makes adjustments to forecast apartment market fundamentals in order to account for the effect of shadow market rentals are select areas of Florida plus Atlanta, Phoenix, Las Vegas, and the Inland Empire.

If your apartment portfolio is heavy on two- and three-bedroom units in suburban Atlanta or select other locales where single-family foreclosures are especially commonplace, the decision that banks will sell off some of their REO product in large chunks could be bad news. But for most operating in the apartment sector, don’t lose any sleep over this development.

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