Prospective Sellers Shift to Renting Out Homes Instead

Stalled home sales are pushing frustrated sellers into the rental market, fostering direct competition for institutional investors in the single-family rental space.

Rising inventory, elevated mortgage rates and weak buyer confidence are prompting homeowners to delist properties and convert them to rentals instead, CNBC reported. These “accidental landlords” are entering markets where institutional players like Invitation Homes, American Homes 4 Rent and Progress Residential dominate.

The largest single-family rental operators concentrate heavily in markets such as Atlanta, Phoenix, Dallas, Houston, Tampa and Charlotte. Each of those companies hold more than one-third of their portfolios in these metros, according to Parcl Labs analysis.

These same markets have seen inventory surge over 20 percent in the past year, coming largely from former owner-occupants.

“When these home sellers cannot find buyers, they face three choices: delist and wait, cut price to find market clearing level, or convert to rental,” said Jesus Leal Trujillo, principal data scientist at Parcl Labs.

A similar situation arose three years ago, when mortgage rate spikes created a surge in accidental landlords.

The supply influx threatens institutional landlords’ pricing power. While major operators have achieved 4 percent to 5 percent renewal rate increases with 75 percent tenant retention, competition could limit future rent growth.

“You’re not going to see big reductions in rent, but maybe you won’t be able to get 4 percent or 5 percent increases on your rent,” Haendel St. Juste, senior equity research analyst at Mizuho Securities, told the outlet. “Maybe it’s just 1 percent to 2 percent in some cases.”

Major rental real estate investment trusts are already selling more homes than they’re acquiring, though they’re shifting capital toward build-to-rent projects rather than competing for resale properties.

The biggest landlords will likely accept declines in occupancy in order to optimize revenue rather than slash rents, St. Juste said. The slow selling season could deliver more rental supply this fall and next spring, limiting growth upside for next year.

— Holden Walter-Warner