\n<\/p>\n
The nation\u2019s single-family investment-property sector<\/a> and the lenders serving those borrowers face some major challenges in 2023 as rent growth<\/a> is slipping, vacancy rates growing, home-value growth faltering, and a possible recession looms.\u00a0<\/p>\n For the non-QM<\/a> lenders serving the single-family investment-property space who have managed interest-rates well to stay ahead of the market, however, there’s still plenty of opportunity to pick up market share, industry observers argue.\u00a0<\/p>\n In addition, secondary market investors continue to show interest in well-underwritten, higher-rate loans secured by single-family rental properties. That, in turn, could lead to improved liquidity outlets for loans secured by single-family investment properties \u2014 through the private-label securitization (PLS) market and via insurers, pension funds and other institutional investors that hold loans or mortgage-backed securities in portfolio.\u00a0<\/p>\n Ben Hunsaker, a portfolio manager focused on securitized credit for California-based\u00a0Beach Point Capital Management<\/strong>, said there are already at least three investment-property backed PLS deals in the cue this year. They include a $405.2 million offering backed by 842 loans, OBX 2023-NQM1 Trust, which is sponsored by\u00a0Onslow Bay Financial,\u00a0<\/strong>according to abond presale report released by\u00a0Kroll Bond Rating Agency<\/strong>\u00a0(KBRA) on Jan. 5. \u201cApproximately 36.8% of the subject [loan] pool is secured by investment properties,\u201d the presale report states.\u00a0<\/p>\n Another of the planned offerings is a $485.9 million deal backed by 902 loans that is sponsored by VMC Asset Pooler LLC, an affiliated of Invictus Capital Partners. <\/strong>The offering is dubbed Verus Securitization Trust 2023-1, according to a KBRA bond presale report released on Jan. 11. The fling shows that 460 loans in the offering, or nearly 40%, are investment properties, with the balance being non-QM loans secured by owner-occupied properties and a handful of second-home loans. <\/p>\n The third deal in motion, also backed in part by investment properties, is now undergoing due-diligence review. It is an estimated 470-loan securitization \u2014 with no value yet assigned in the due-diligence documents filed with the\u00a0U.S. Securities and Exchange Commission<\/strong>. The pending offering, called NRMLT 2023-NQM1, is sponsored by\u00a0Rithm Capital<\/strong>, formerly known as<\/a>\u00a0New Residential<\/strong>.\u00a0<\/p>\n \u201cIt looks to be about 50% investor properties,\u201d Ben Hunsaker said of the planned NRMLT offering.<\/p>\n The PLS deals in the pipeline are a sign that investment-property mortgages are still in demand \u2014 both by borrowers and bond investors. <\/p>\n Still, it\u2019s far from all good news for nonbank lenders. High interest rates and inflation are projected to shrink<\/a> overall mortgage originations in 2023 \u2014 including in the investment-property space\u2014 compared with 2022, a year in which the bleeding had already begun.<\/p>\n National real estate brokerage platform\u00a0Redfin<\/strong>\u00a0reports that investor home purchases dropped more than 30% year over year in the third-quarter of 2022, which is \u201cthe largest decline since the Great Recession, aside from the second quarter of 2020,\u201d at the height of the pandemic.<\/p>\n The\u00a0Mortgage Bankers Association<\/strong>\u2019s (MBA\u2019s) most recent market forecast projects that overall mortgage origination this year will dip<\/a> to $1.45 trillion \u2014 down by 15% compared with 2022. Mortgage production in 2022 nationally was down about 50% from $4.44 trillion in 2021 \u2014 a year in which 30-year fixed mortgage rates<\/a> were about half of what they are today.<\/p>\n \u201cWe are expecting a recession in the first half of 2023, which will result in the unemployment rate increasing \u2026 to 5.5% by the end of 2023,\u201d the MBA\u2019s December market-forecast report states. The nation\u2019s unemployment rate stood at 3.5% as of December<\/a> \u2014 with an estimated 5.7 million unemployed people.<\/p>\n That market contraction, along with a more difficult inflationary operating environment for property owners and businesses generally, is also expected to be a drag on the potential volume of loan originations secured by single-family rental properties. That is happening in the context of a shrinking universe of lenders capable of serving that market, however, creating an opportunity for the\u00a0healthier non-QM lenders<\/a>\u00a0to expand their market share, according to Hunsaker.\u00a0<\/p>\n \u201cI think if you look at the landscape for originators \u2026 the guys [non-QM lenders] who survived, who thrived, managed their interest-rate risk well and are still able to quote and lock [loans],\u201d Hunsaker said. \u201cThey were quoting and locking [loans] at probably [a range of] 8.75% to 10.5%, and while you’re seeing investor non-QM origination rates down, [they\u2019re down] less than owner-occupied non-QM loans.\u201d<\/p>\n He added, however, there also are many non-QM lenders that have not fared as well and now don’t have the warehousing capacity or the interest-rate risk-management capacity to excel in the current market.<\/p>\n \u201cAnd so, what do you have to do? You have to cut your production and keep it to what you can fund with cash on hand or with a relatively conservative warehouse capacity,\u201d he added. \u201cI think that cohort of the origination market [those not prepared for the current market dynamics] has probably seen more volume declines than the cohort that either has balance-sheet capacity or has forward-flow agreements or has some sort of a [liquidity] take off.\u201d<\/p>\n Although there is already some PLS deal activity involving investment-property loans cued up early in 2023, projections from the\u00a0Kroll Bond Rating Agency<\/strong>\u00a0(KBRA) show that overall PLS issuance in 2023 will be down by as much as 40% in 2023, compared with 2022. And 2022 was off by some 17% from 2021. Securitization has traditionally been one of the major liquidity channels for many nonbank lenders.<\/p>\n PLS offerings backed by investment properties across the prime and nonprime space, based on deals tracked by KBRA, slowed considerably as interest rates rose<\/a> in 2022 \u2014\u00a0\u00a0with the rate on a 30-year fixed mortgage starting the year at 3.22% and ending 2022 near 6.5%, according to\u00a0Freddie Mac<\/a>. Rising rates and associated volatility made executing securitization transactions profitably incredibly difficult for most deal sponsors.\u00a0<\/p>\n KBRA\u2019s data show that for the full year in 2022, there were some 43 PLS offerings valued at $17.5 billion that were backed in whole or in part by investment properties. Only 10 of those deals, worth about $3.3 billion, were issued in the final six months of 2022, however. Those deals involve investment properties owned by individuals or small \u201cmom and pop\u201d landlords and do not include securitizations undertaken by large institutional owners of investment properties \u2014 the so-called Wall Street investors.<\/p>\n \u201cThere’s some of that [investment-property collateral] going into securitizations [now], but we don’t think the backlog is very big relative to where you historically have seen it in the December-January time frame,\u201d Hunsaker said, adding on a positive note, however, that \u201cwe\u2019ve seen securitization spreads firm up over the past 20 or 30 days.\u201d That is happening in the context of inflation showing signs of abating as well \u2014 down from annualized high of 9.1% in June to 6.5% as of December, based on the\u00a0Consumer Price Index.<\/a><\/p>\n \u201cWe\u2019ve also heard a lot of it [single-family investment-property collateral] has gone to \u2026 more balance-sheet oriented end users, such as insurance companies, banks, and some non-securitization [players] using private credit funds,\u201d Hunsaker added. \u201cI think [institutions] like that are stoked to get a 9% to 10% yield range on those assets \u2014 maybe a little bit less.\u201d<\/p>\n The economic doldrums slowing growth in the overall housing market, including rental rates more recently, if not reversed, will continue to negatively affect both new loan originations in the year ahead and the profit margins for single-family rental investors. That includes rentals owned by so-called mom-and-pop landlords \u2014 with 10 or fewer properties. Those smaller-scale landlords account for the bulk of the nation\u2019s single-family investment-property market.\u00a0<\/p>\n Although the single-family rental market is distinct from the multifamily apartment market, they both compete for the nation\u2019s pool of renters. And across the apartment market over the past four months, rental and occupancy rates been declining, with \u201cmore multifamily units under construction than at any point since 1970,\u201d according to a recent report by rental marketplace\u00a0Apartment List<\/a><\/strong>, which has some 6 million rental units listed on its platform,\u00a0<\/p>\n \u201cWe estimate that the national median rent fell by 0.8 percent month-over-month in December \u2026 the fourth consecutive monthly decline, and the third largest monthly decline in the history of our estimates, which start in January 2017,\u201d the Apartment List report states. \u201cThe preceding two months (October and November 2022) are the only two months with sharper declines.<\/p>\n \u201c\u2026 In the most recent four months from August through November, it [the vacancy rate] has increased by 0.8 percentage points, reaching 5.9% this month [December, up from 4.1% in October 2021]. \u2026We expect that 2023 will be a year of flat to modest rent growth, but it is unlikely that prices will fall significantly throughout the year.\u201d<\/p>\n In addition to the economic strain being felt by mom-and-pop landlords due to increasing costs fueled by inflation as rental and occupancy rates plateau, market experts say the economic drag will hit even harder the short-term rental sector \u2014 which is dominated by less-experienced investors listing their rental properties through online platforms like Airbnb<\/strong> and Expedia<\/strong>\u2019s Vrbo<\/strong>. <\/p>\n A recently released report by short-term rental analytics firm\u00a0AirDNA<\/a><\/strong>\u00a0projects that this year the supply of short-term rental units will increase by 9% while demand for rooms is projected to increase at only a 5.5% clip. The result, according to the report, is that revenue per available room is expected to decrease in 2023 by 1.6% year over year \u2014 compared with a 2.1% year-over-year gain in 2022 and a nearly 28% bump in 2021.<\/p>\n \u201cSo, in 2022, we saw about 20% demand growth,\u201d said Jamie Lane, vice president of research at AirDNA. \u201c[This] year, we’re expecting [less than] 6%. <\/p>\n \u201cThat is a significant slowing.\u201d<\/p>\n Lane added that the projected supply growth for 2023 is likely to come, to a large degree, from homeowners who now have very low interest rates, compared with the current market, and \u201cmaybe were thinking of moving, but they don\u2019t necessarily want to give up their home with that 3% mortgage, so they\u2019ll rent it out\u201d instead.<\/p>\n \u201cWhat you’ve seen [in the short-term rental market] is you go from premiums of about 80% [in 2021] \u2014 i.e., the revenue that you’d earn is almost double what the cost of that revenue is,\u201d Lane said. \u201cAnd that’s gone down [as of late 2022] to about 10% or so.<\/p>\n There is opportunity ahead in the single-family investment property sector, however, for lenders and borrowers alike who do their homework and understand the peculiarities of the markets they are operating in today \u2014 and act accordingly, market experts say.<\/p>\n \u201cIn certain markets, like in Phoenix, certain parts of Florida and the Southeast, [for example], I agree there were basically fields of homes built, and they were built based off the extreme growth we saw in 2020, 2021 \u2026 and that [development] may have outpaced the demand growth in those areas,\u201d said Doug Faron, a founding partner of Florida-based\u00a0Shoreham Capital<\/strong><\/a>,<\/strong>\u00a0a build-for-rent and multifamily residential developer. \u201cWe’re really thinking about rental yields.\u00a0<\/p>\n \u201cWe’re thinking about what the end buyer wants, which with us is an institutional fund. What yields are they [the end buyers] targeting for their investments and can we \u2014 because of where we think rents are going [in a specific area] and how we’re going to manage this asset \u2014 achieve a yield and exit that makes sense.\u201d<\/p>\n It may well be a case of not letting the good be the enemy of the perfect when it comes to investment-property plays in the current dour housing market. As evidence that some investors seem to see it that way, loan-aggregation platform MAXEX<\/strong> reveals in a December market report that its investment-property loan-trading volume has expanded significantly over the past few months, with nearly two-thirds of locks \u201ccoming in the form of investment-property loans.\u201d<\/p>\n Nadia Evangelou, senior economist and director of real estate research at the\u00a0National Association of Realtors<\/strong>, also provides some indirect rational for continued optimism about the single-family investment-property market overall in the current high-rate environment.<\/p>\n \u201cWith the qualifying income near the $100,000 threshold, 32% of all households and [only] 15% of all renters can currently afford to buy the median-priced home,\u201d she said.\u00a0<\/p>\n The MAXEX report concludes that the high cost of financing a home purchase \u201chas relegated many would-be homebuyers to the sidelines, where renting is the more affordable option for the time being.\u201d <\/p>\n \u201c\u2026 This has created a strong market for real estate investors who continued to buy homes despite elevated home prices and higher interest rates,\u201d the MAXEX report concludes.<\/p>\n Rick Sharga, executive vice president of marketing for real-estate research firm\u00a0RealtyTrac,<\/strong> explained in a prior interview that the time horizon for most investors in the rental-property market tends to be longer-term.<\/p>\n \u201cSo, even if there is a [home]-price correction, with a longer time horizon, you’re more likely to be able to ride that out and get back to where you were, and actually ahead of where you were,\u201d he explained. \u201cIn the meanwhile, you’ve been renting it out, at least at a breakeven number for that that whole period of time, and in most cases probably cashflow positive. <\/p>\n \u201cI personally think the rental sector of the market is a little less vulnerable to bubbles, to price increases and decreases.\u201d<\/p>\nEmpty sails in single-family<\/h2>\n
Short term rental growth is slowing<\/h2>\n
Staying alive in single-family<\/h2>\n