Listen to our exclusive audio interview with Tawan Davis. Can blocks of single-family homes be managed as if they were a multifamily property?
The investment firm says it’s focusing on providing affordable workforce housing for the rental market, and sees a profit opportunity in managing blocks of single-family homes in urban markets using a multifamily management model.
Steinbridge is committing $425 million for the acquisition and refurbishment of single-family and small multifamily residences as rental housing in transitioning neighborhoods in major US cities, starting with Philadelphia.
The strategy, according to Steinbridge Group CEO Tawan Davis, focuses on middle income family residences near transportation and employment. Steinbridge recently launched the program in Philadelphia with the acquisition of approximately 60 homes.
“There’s been a significant change in the housing space since the financial crisis,” says Davis, who previously spent time managing private real estate equity for Prudential and Goldman Sachs. “There’s been about a 17% decrease in home ownership, a sharp rise in rentership, it’s tougher to get a mortgage.” People who used to rent for 2.2 years now wait more than six years before buying a home, he says.
Meanwhile, the average mortgage as a percentage of household income has nearly doubled during that time. Nearly half of Americans also spend more than 30 percent of their incomes on housing, up from one third.
In Philadelphia, Steinbridge has an investment target of $50 to $60 million, or approximately 500 properties. The company plans to expand into other dense urban markets including Northern New Jersey, the New York City outer boroughs, Baltimore, Chicago, Washington, DC, Boston, and others.
The properties will be managed centrally in the market, with local resources devoted to maintenance, repairs, and property oversight, Davis says. “We think of it as horizontal multifamily,” he says. “We can do that particularly well in the city,” mainly because the single family assets are “substantially similar.”
Swaths of homes were built that were essentially the same, he says, in communities of row homes. “We’re able to buy them in a way that enables us to manage our costs, to manage our capital expenditures, to predict our capital expenditures,” he says. “We think we have a competitive advantage on cost, because we are literally buying the same asset over and over.”
Davis notes that Steinbridge identified Philadelphia as its debut market given the city’s significant population, growing economy, demand for housing, and transitioning neighborhoods. “Philadelphia is a tremendous city,” he said. “Our intention is to be a long-term presence in the City, and to contribute to the vitality of the neighborhoods where we invest.”
“We are focused on providing quality homes for workforce employees and their families who need or want to live close to the urban core but are unable to purchase homes,” says Davis. “These neighborhoods show consistent need and demand for rental homes, while providing long-term value improvement.”
Davis’ initial focus is on the University City submarket west of 30th Street Station, Gray’s Ferry, and Brewerytown where it meets Strawberry Mansion. The firm is also looking at opportunities in Port Richmond.
“If you drop a pin at City Hall, and draw a circle with a radius of 2.4 to 2.6 miles, you capture some of the most dramatic growth in real estate values and real estate prices in the United States,” Davis says. “Our approach is not to do the ‘fix and flipper,’ but really being the smooth part of the curve in the transition in those neighborhoods, so providing the affordable units for those tenants and those folks in those neighborhoods, but also benefitting from the increased value and the increased possibilities that come along with the transition in the neighborhood.”
At nearly $3 trillion, the US single family home market outpaces the multifamily market (approximately $2.5 trillion), but institutional investors own fewer than 300,000 (less than two percent) of the 14 million single family homes for rent. Before 2012, there were no single-family rental securitizations, REITS, or institutional owners in the market, Davis says.
“Because of the transition in American housing, and the unique opportunity that has emerged, the debt and equity markets have really focused on institutionalizing that space,” he says. “It’s one of the real growth areas in the American real estate space.”
Institutional ownership of single-family properties makes sense because of the better opportunities for returns vs. multifamily assets, Davis says.
“In response to the housing transition in the U.S., investors and developers initially focused on high-end amenitized multifamily units, which drove down cap rates and now achieve limited rent growth to make returns,” Davis said. “From an investment perspective, return spreads over interest rates for single family homes are consistently positive and higher than those for multifamily residential in major US cities.”
Read the full article at Globe Street.