Residential Housing as an Alternative Investment: Why Housing Demand Translates Into Rental Investment Opportunities, How To Invest and Views on Regional Variation
If you’ve entered the residential housing market over the past year or two, whether to buy or rent, you know that the market changed rapidly in a short time. And if you didn’t foray into the market yourself, chances are you talked through its latest twists and turns with a close friend or family member.
During these discussions, it’s easy to forget that the housing market isn’t just for finding a place to call home – it’s a robust and multi-faceted investment marketplace and one of the key segments of alternative investing, which has drawn strong interest in 2022 as equity and bond markets fluctuated.
An alternative assets manager with more than $15 billion in acquired and managed assets, Bluerock, acting through its distribution firm Bluerock Capital Markets, raised $6.7 billion since 2019, and its flagship real estate fund grew from $3.5 billion in June 2021 to $6.5 billion in June 2022, making it the third largest interval fund by net assets as of June 30.
Joining Bluerock in 2009, Josh Hoffman serves as Managing Director at Bluerock and President of Bluerock Value Exchange, a fund that sponsors syndicated 1031 exchange offerings. Raising over $8 billion during his career, Hoffman’s experience includes alternative product structuring, interval funds, publicly traded REITs and private and public non-traded REITs.
We sat down with Hoffman to learn about the residential housing sector’s trajectory, regional variations and the best ways to invest.
WSR: Provide us with an overview of the residential housing sector for the remainder of this year and 2023. What are the major factors affecting residential housing and how will the market develop? Are there any wild card events that could shift the outcome?
Hoffman: The biggest force in today’s housing market is the significant undersupply in both the apartment and single-family rental space as well as for-sale housing, which is currently estimated at a combined 3.8 million households. Going forward in the near term, we believe the residential housing sector outlook will be bifurcated by rental versus for-sale projects.
The for-sale market is likely to struggle with higher borrowing rates and high prices creating significant affordability issues. In fact, current estimates project the average cost of buying a home is more than $1,000 higher monthly than the cost to rent, nationally. This is likely to spur demand for single-family rentals and build-for-rent communities developed specifically for renters.
The biggest wild cards are interest rates and the possibility of an economic slowdown or recession. As interest rates rise, for-sale housing has become less affordable, but a reversal of that could reignite a for-sale boom and temper single-family rental demand, to some degree, though we think that is unlikely given the course of the Federal Reserve and the large monthly payment gap between renting and owning.
A recession that includes significant job losses could slow overall household demand but with current unemployment at 3.5%, we see this as an unlikely scenario.
WSR: What is the best type of investment approach for residential real estate? Builders? Corporate landlords and rentals? Private funds? REITs? Or should the type of investment someone chooses vary according to their goals and risk tolerance, tax situation, etc.? Are there any types of investors who should steer clear of residential real estate?
Hoffman: While individual investors should always choose the most prudent course of action depending on their specific situation, we believe the best opportunity in the residential sector is the single-family rental space and specifically, build-for-rent communities.
As the millennial cohort ages and forms households and families, they are demanding more space, but because of the for-sale affordability problem, many will seek the benefits of a new home and community without the ownership financial hurdles. Many are also attracted to new build-for-rent communities versus a rental home in a pocket of for-sale homes.
We believe a price point from approximately $1,000-$2,500 per month is most appealing in the marketplace. From a capital markets perspective, only 2-3% of the 17 million rental homes in the U.S. are owned institutionally whereas that number is approaching 50% in multifamily, so there is a tremendous first-mover advantage.
Asset managers are continuing to provide opportunities for investors to gain access to this asset class through REITs, and other direct real estate investment structures that provide for low minimum investment and attractive income and total return potential. Historically, real estate has also proven to be a great hedge against inflation and can benefit well-diversified portfolios.
WSR: What types of regional or geographic variations will emerge? Should investments focus on certain markets or avoid certain markets? Or is it better to go with national investment managers and let them solve geography issues?
Hoffman: A manager with a national perspective is critical as they can actively manage a portfolio of assets and adapt to market conditions capitalizing on growing markets across the nation.
Markets should have good growth prospects based on population influx, attractive quality of life characteristics, and strong economic bases driven by industries of the future including bioscience, healthcare and education. Long-term growth prospects combined with some barriers to development for these markets should drive rental rates higher.
We currently see multiple mid-sized markets in the Sunbelt and western regions and select others that exhibit these traits. However, it is increasingly important to evaluate new and emerging markets as they reach critical mass for investment.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org