54: The Rise of Build-to-Rent: The Growing Influence of Institutional Investors with Richard Ross of Quinn Residences Part 1

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All know build to rent is a huge trend. We've reported on that for many, many years. Institutional players are making a bigger and bigger mark on the real estate market. However, the question is always compared to what? Compared to the overall housing stock. They're still a very small player, but they are getting bigger and bigger. And it's really important to talk about this trend. So we have a great guest to do that today, Richard Ross, CEO of Quinn Residences. They started only about five years ago. They have just over 5,000 homes, purpose built, build to rent. We're going to talk about some really interesting rental and price appreciation trends and why this asset class is the right place to be. Richard, welcome. How are you?

I'm well, thank you, Jason. Glad to be here. I appreciate you having me on the show.

My pleasure. You're coming to us from Atlanta and you are looking to raise a whole bunch more money and get another 5,000 units under your belt, I hear.

That's correct. We are already well along in the process.

Fantastic. So just broadly speaking, Richard, what makes you and your competitors in the space so bullish about single family rental properties?

So there's a couple things, Jason, that are driving the business today and have been for the last, let's say, 10 years, but really the last five pre pandemic, and that is a shortage of supply of affordable, what I would call reasonably priced housing in this country. Depending on who you believe, there's a shortage somewhere between 3 and 6 million homes in this country, meaning we haven't built enough homes since the gfc, Right. Since the great financial crisis. So there's a shortage of supply. Then you turn to the demand side, right? And you have aging millennials, right? Millennials are turning 30, mid-30s, late-30s.

The oldest millennial is 43 now. So there you go.

And they're having children later. And typically, right, young people live in an apartment for the early stages of their life, whether that's from 25 to 30. And so that cohort is aging. So they're coming out of apartments. Forget the pandemic. This is all before the pandemic, when we started this business. As that cohort ages, they, they may have children, may not. And we'll get to the demographics of our particular residents because it's very surprising. And then you have the pandemic that threw, I like to say, gasoline on that migration out of sort of the apartment, the shared corridor into a more single family home type of living situation because people didn't want to share internal spaces. And then you have also.

In other words. I just want to stop on that for a second. In other words, during the pandemic, as I predicted, roommates would, would split up and there would be fewer people to a household, which we've definitely seen that trend come true. I was right about that, correct?

Absolutely. That. And you even, even if you're alone in an apartment or it's you and your partner, you don't want to walk down the same corridor where Bill and Susie are walking down and they've, they've got Covid and they're coughing or whatever. So.

And, and you don't want, you definitely don't want to be in the same elevator. Correct?

Exactly. And so our product, what we, our product is, is we build communities purposely for rent. And they're either townhomes or what we call detached homes, detached single family homes or townhomes, where you have your own entrance, two car garage, typically a fenced backyard. That's our sweet spot. And the other thing you're seeing in the demographics and the resident profile is that there are a lot of folks who are renters by choice. Today, renting has always been about 15% of the population. And I can put some, some information up on the screen that'll.

Yeah, please, please do. You've got some great charts and graphs for us.

Let me just share this first one here.

All right. For those listening just on audio only, not seeing the video, this chart is showing a large addressable market in the early stage of its institutionalization. What does that mean? That's a complicated way to say, look, there's a big market here and institutional investors are jumping in. And we're showing here that there's about 132 million total households. I reported on that, for about 45 million are rental households and 87 million are owned homes. So let's split this up a little more, Richard, and look at apartments.

So let me, let me walk you through it. And by the way, historically, this ratio of 2/3 owned homes to 1/3 rental has been consistent in this country for the last 40 years. So that percentage, it changes 1 1% or 2% every year, but not much. And then if you take that third, 30, a third of rental homes, which is 45 million rental homes, and you start looking at what up those rentals, 47% are just under half are apartments.

Right.

Five unit apartment buildings or more, a third are single family rental houses, which is the sector that we play in, right? Then you have two to four unit buildings. Those are like duplexes and smaller, which maybe many of your investors own, your audience owns. And then you have sort of manufactured and other rentals. So with that 14 and a half million single family rental homes. What's, what's interesting in this, in this slide here is there's a very small percentage of their institutionally owned, meaning your target audience owns the other 97%, which are between one and, and let's say 50 rental properties. Most of that is housed in people who own, you know, one to five rental units. When you look at the build to rent share of those single family rentals. So that 14 and a half million, say only less than 1%, which is what, 150,000 homes are built to rent.

So. Okay, so let me, let me recap that for a second. So of the rent homes, you know, some are apartments, some are single family, some are plexes, if you will, some are mobile homes and so forth. Okay. Or manufactured homes. And then how many of the rental homes of any type are institutionally owned? That's just 3%. And look, I like RFK. I was honored to share the stage with him at a recent event where we were both speakers. But he and other politicians have sort of fear mongered this a bit. Oh, institutional investors are buying up America. Soon you'll have to rent your home from blackrock. You know, and, and this is just not tr, folks.

Yeah, the facts do not bear that out.

No, not even close. Look, 97% of the rentals housing stock in the US is owned by regular non institutional investors. Okay? Only 3% is institutional. And of that small amount of 3%, only 1% of that was designed to be rented, as in other words, BTR or build to rent. 99% of that, they're just buying regular single family homes. Now I guess there you could fear monger a bit and say, well, they're competing with regular families wanting to buy regular single family housing stock and rent them. But you know what, I really wonder about this chart, Richard, which I'm not sure it's really showing us this. Of the 3% that are owned by. Oh, these are all SFRs. They don't include apartments. Got it?

Correct. Correct. They are about 30 to 50% institutionally owned. Right. Hands by market.

And then in mom, that's.

That may be where this business goes over the next 30 years. But this 90, 97 or 99% are typically investors, again, who you don't know how they Came about. It starts, I believe it starts when, you know, you live in a home, you're in your starter home, you're a 35 year old millennial couple and you bought your starter home and then you want to move up. So you move up. But instead of selling your original home, you rent it, right. And then you might see, oh, this is a really good little side business, good investment. So maybe I'll buy another home down the street or in the next town over and you know, maybe it's in disrep repair and I'll fix it up and you know, then rent it. So I think that's how you get these 99 that are non institutional and someone, you know, over time, over five or ten years accumulates, you know, five, six, seven, ten of these units. That's happening all over the country and has been.

People have definitely discovered that this is the most historically proven asset class in the world. I've been saying that for, you know, 25 years, but, you know, finally the world has discovered it. Okay, so I mean, elaborate on this a bit. Those are some good numbers you just shared with us. What do you see happening? Where is this going? I mean, how much of the housing stock will be owned by institutional owners for single family housing stock?

So what has happened, I think a good indicator, right, or arbiter of that is to look at multifamily. I started my career in multifamily in the early 90s when there were all the big companies that own apartments today. And you know the names. It's Avalon Bay, it's Camden, it's Mid America Company. Yeah, these are all big public companies.

Sure.

They were all created and in the early 90s and back then their percentages were like we just saw on the chart, less than 5%. Today they're somewhere between 35 and 50. It depends on again who you believe and what the universe is. And that's probably where it will stay. Right, because you're going to have mom and pop, as we call them, owners and smaller companies that own. So that is the opportunity in the build to rent sector. But it took 30 years in the apartment industry asset class to get to that concentration of institutional ownership.

Yeah. Okay, so do you see the money continuing to flow to these institutional players so they can buy a lot more stock. And what's the more recent trend? Is it, you know, slower now or are they on big acquisition binges?

Well, no, obviously interest, the interest rate environment has sort of put the brakes on. I would say that the go go days, if you Will, when, when there was essentially free you're sub 3% interest rates. So that over the last two years has really put the brakes on new investment and new purchasing and building of communities for rent. Having said that, as we talked earlier in the show, the dearth of supply and the demand drivers which are aging millennials and all the things. Look, I'm going to, I'm going to share another particular slide with you. So this showed you, shows you sort of the demand. We talked a little bit about the supply that's on the right side of this chart. Meaning you see shortage of homes for 2024 is estimated at 3 million, going up to 3.6 million in 28. This is very conservative number. Some people put it at 5 to 6 million. What this chart shows you at the bottom right is that we're still not building enough homes in this country. And I'll give you an example. I may get the numbers wrong, but they're close. In 2023, a million seven households were formed in this country. That means roommates moved out or people left their parents or they became of age or you had immigration. Right. A huge immig immigration in this country. So 1.7 million households were formed. We only built a million four homes. Meaning we're getting farther behind. So that 3 million, 5 million, 6 million shortage is getting bigger, not smaller.

Right. We're not even keeping pace. Exactly right. But Richard, you know, and I, I rail on them all the time. There are so many of these doomers, they're all over YouTube with their clickbait titles about the housing shortages. Not true. You know, they, they say that there's ample supply, there to be a crash and all of this stuff. I mean, what do you say to that? I know it's not true because I have firsthand experience every day for decades in seeing how this is playing out. But there are some that manage to spin the statistics and sort of spin doctor the numbers and make you think there's not a housing shortage.

Right. I think what you have to base it on is the hard facts. And that is we know the Census Bureau puts out this data. They spend a lot time of have our taxpayer dollars on accumulating it. And it's very clear how many households are formed and how many homes there are. And it's very clear there's a shortage. And I'll give you just very straightforward answer.

And one more thing I'll add to that. It's very clear that it's going to get a lot worse before it gets better. Go Ahead.

Correct. Because people are aging. And when, when people. As the population ages. So I'm going to, in the slide I'm showing the upper left, you see the average age of people 35 to 44. Who are our residents? That's who typically our average age is years old.

So they're renting your single family homes, right?

Yeah.

Your average rent.

Our average resident is 39 years old. You see how that's continuing to grow. So those people are coming out of apartments or mom and dad.

Right.

Living with parents and moving into, to our homes, which is the demand side of the equation.

And so let me speak to that demand side for a moment. The demand is huge. The demographics coming at the rental housing market are nothing short of phenomenal. I said that in 2010. I renewed that again in 2020. You know, every decade I try and make some big macro prediction like that, and it's absolutely still true. But one of the things that people fail to realize is that, you know, during the Great Recession or the global financial crisis, whatever you want to call it, we heard a lot about shadow supply, shadow inventory. Right. All of these houses that were in distress, that were going to hit the market, market and, and they ultimately did. And there was price discovery and you know, we've recovered from that a long time ago. But what we have now is we have lots of shadow demand of all these people living at home with their parents. I mean, it's huge numbers. I've done studies on this, I've shared it on the show before. These are giant numbers of people living at home with their parents. Until much later in life I'm single. And I cannot believe how it's changed from when I was in my 20s, seeing, you know, these different women I date that are like in their 30s, they're living at home with their parents. I mean you would never, that would have never been the way it was when I was in my 20s. Right. They all moved out after college, could afford a place of their own, bought a condo or rented one or you know, you know, an apartment. They didn't live at home with her parents. So these people eventually move out and they do some adulting. I love that expression, adulting. And they get their own home and they form their own household sold. And that represents a huge amount of shadow demand for an under supplied market. And that's just one area of shadow demand, the living at home population cohort.

Right. And then when, when those people make the decision, right. To leave home. Let's just use that your example.

Or their parents make the decision.

Right. So back in the day when I was a young man and you know, I left home, you bought a house. I mean, that was just the American dream. You buy a house. Well, they can't do that now. Now for a couple of reasons. Down payment, 20% down payment. Typically, unless you get some sort of federal assistance. Got to have a credit score.

Not if you have an FHA loan.

I mean, all right, so 5%. All right. But the average starter home now is, is $400,000. So there's still an out of pocket. You got to have a credit score.

Right.

And so what, what is driving the demand side of our business is when you look, we deal in starter homes. Right, Jason? So we're talking a home that costs anywhere from 300 to 400,000 do.

Which is funny that we call that a starter home nowadays, but. Correct.

Yeah, my first home was $84,000. But having said that, we deal in starter homes and what we found is our homes, same exact home. So if you take one of our homes and put it next to a retail, as we call it, a starter home that somebody wants to buy, were depending on the location, somewhere between 40 and 60% less per month, month rent one of our homes than to buy the same exact home.

Do you have some analysis on that? Like. Well, before we do that, I, I want to talk about why you're less expensive. Okay. But I want to look at this other part of the chart you have on the screen here that shows. Well, let's look at migration. Okay, so talk about the migration.

Well, this just shows because we're focused.

On domestic and international migration.

Right. The Southeast is primarily the South. South is where the migration is from. Right. So within the country, everybody's moving south.

You meant where the migration is going.

Is going. Sorry, yes. And it's coming from in particular the Northeast and the high tax states also. And the West. California Californians are moving to Nevada, they're moving to Texas.

Right, so. So the migration trends are people leaving expensive markets, people leaving business, unfriendly markets, and people leaving cold places.

Correct, got it. And they're coming to places that offer a different climate, a different employment prospect and a different tax structure.

Okay, so now the other one I wanted to talk to you about is the US Single family permits by year. This is staggering. If you're listening on audio only, I've shown you charts like this. I've shared charts like this over the years. This is just shocking because after the Great Recession, well, during the Great Recession, I should say the Building just stopped. It screeched to a halt. And for many, many years there was this incredible under building. And that's why we got so far behind and why we have such a big housing shortage in this country. And you know, these housing shortage things, although I, I do not have as much knowledge about it, are also true in many places around the world. This is not just a US phenomenon, by the way, right. This is a trailing 35 year average, meaning that the 35 year old person. Right. That's why you're doing the trailing. Right. Elaborate on that.

Well, no, it's because.

Because that's the, the year that they're forming a household or you know, so typically.

Right. And it's getting later, right. Probably when I was young, it was probably 27, 28 when you know, you either got out of college or and you got your first job and then you met your spouse and then, then you chose to have children. You're now 27, 28. That age is pushing up to 35, which is why our average resident is now 39 years old.

And we'll be back with a lot more on this topic with this guest on our next episode.

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