Fresno's housing/rental market has generally not been on the radar of private equity investors, though trends in the face of increased demand have gone the way of institutional ownership over mom-and-pop. Adobe Stock image

As concern grows over the accessibility of homeownership for Americans, a rise in investor interest continues to add fuel to the fire.

Wall Street companies are now becoming leading buyers in the single-family market. MetLife Investment Management projects that by 2030, 40% of single-family homes could be controlled by private equity firms.

 

A brief history

This isn’t the first time private investors/equity firms have flooded the housing market. Robin Kane, Fresno-based managing director of capital markets leader Northmarq, said the country saw this after the Great Recessions, when no income, no job and no assets (NINJA) loans were being foreclosed.

“The government was saddled with billions of dollars of these bad loans. So they made a deal with very large Wall Street firms at that time. And then they sold for pennies on the dollar, these mortgages to these investment firms, hedge funds,” said Kane.

Some of these firms included Colony Capital and Blackstone Group, Inc. A number of firms purchased these mortgages, foreclosed on them and took over the houses.

The initial intention was to clean them up, put them out for rent, and then resell them. Kane said they discovered in that process that these homes would serve well to renters — they then decided to make a business out of it.

What was supposed to be a three-year plan turned into a 15-year plan to turn these single-family homes into rent-only homes. From 2014 to 2018, these private equity firms/investors became a major force in the housing market, buying up houses — and not only foreclosure sales.

The Central Valley has not been on the radar as much as larger cities like Atlanta, Phoenix, Dallas, Denver, and Las Vegas. California has been a difficult place for these private equity firms to purchase and build their homes. The state is expensive to build in — with costs and various fees.

The cost of construction has also increased, which has swayed away these private equity firms. A city like Phoenix, which has been by far the market where build-to-rent development shined brightest in 2023, is the reason why: the land is plentiful. Completions in Phoenix totaled 4,030 units, more than double year-over-year and at a 10-year high for the metro.

Another factor in why the Central Valley isn’t a top priority location is that the rents are not high enough to justify the construction costs.

“When talking about 7-8% mortgages for the individual homeowner, they’re struggling to make that work or as an investment. You do concern yourself with the cost of your financing, but you’re dealing with people who have a lot deeper pockets, so they’re less affected by the rise in interest rates as you have with the typical homebuyer,” said Kane.

 

What is built-to-rent?

Today, these firms are sitting on a multitude of houses that they bought over the last 10-15 years. The options are to either buy out or grow organically. Many went on to buy smaller operators who may have had a share of homes.

Many firms migrated to BTRs, or built-to-rent, contracting with builders to create brand-new subdivisions — homes were never intended to go for sale. Some can already be found in Nevada, Arizona, Texas, Florida and Georgia, and it’s beginning to grow in California.

As built-to-rent grows, so has pushback from communities arguing that private equity firms price residents out of the market.

 

Pros of built-to-rent homes

For many tenants, built-to-rent homes are the perfect option. As a renter of a single-family home, they are on a street full of renters.

“You’re almost treated as second-class citizens because everyone owns their home. But if you’re in a neighborhood where on both sides of the block everyone’s a renter, everyone shares the maintenance, and the owner of the whole block maintains the yards, it’s less intimidating,” said Kane.

The challenge to buying a home lies especially for those who work from home and those who work remotely with companies that are out of the area, but love Fresno. That increases demand for these built-to-rent homes. They can pay higher rents, putting pressure on the demand side, which tends to price out people who otherwise would not have to compete.

“I think it’s here to stay, and this is not a temporary phenomenon. It is a growing trend that what normally used to be a mom-and-pop business has become more of an institutional type of ownership, which is a good thing,” said Kane. “I think technology has made this so much easier.”