How Institutional Real Estate Investors Are Depleting the Housing Supply

by Patrick Freeze  9/08/2022
How-Institutional-Real-Estate-Investors-Are-Depleting-the-Housing-Supply

The current housing market is quite brutal for tenants and potential home buyers. Recently, we’ve seen institutional real estate investors scoop up massive numbers of houses and other types of real estate. Unfortunately, this makes homes more unattainable for tenants and homebuyers. So, do you wonder what effects industrial real estate investors have on the housing supply? Keep reading as we discuss. 

institutional-real-estate-investors

What Is Institutional Real Estate?

Institutional-grade real estate includes various types of properties generally owned or financed by institutional investors. Then, these high-end buildings are leased to regional or national credit tenants with outstanding store sales or business revenues. 

Typically, institutional real estate investors focus on core property types, like offices, retail buildings, industrial, and multifamily real estate. However, they may invest in other types, like data centers, healthcare offices, hotels, senior housing, and more. 

changing-rental-market

Overall, institutional-grade real estate is either Class A or Class A+ property with minimal risk of deteriorating or becoming outdated. In other words, these properties are generally brand new with the best amenities or state-of-the-art integrated systems. In fact, there are often three categories that investors will look at before making a purchase. 

For instance, the investment must be: 

  1. Safe- To minimize risk, institutional investors look for favorable market conditions and choose safe investments instead of more risky ones. 
  2. Significant- Assets in this category are around $50 million or more. However, investors can pool smaller assets together to create larger portfolios valued at this high dollar amount. 
  3. Quality- A property must be in excellent condition for an investor to consider it. Investors also consider the sponsor’s quality to ensure a well-managed asset.

Next, let’s go over what an institutional investor is and how they operate. 

What Is an Institutional Real Estate Investor?

Institutional real estate investors are large entities that invest millions (or even billions) of dollars into real estate on behalf of their clients or shareholders. For instance, some examples of institutional organizations include: 

  • Hedge Funds – Collect capital from institutional investors with the intent of generating above-market returns for their investors. 
  • Mutual Funds – These may consist of stocks or fixed-income funds that general income for investors.

large-investment

  • Investment Banks – Brokers and financial professionals may invest on behalf of themselves by financing commercial real estate investments. 
  • Large Pension Funds – A retirement plan that provides incoem fro the retiree.
  • Insurance Companies – Money received as insurance premiums is reinvested in stable income-producing assets.
  • Endowment Funds – Capital is raised by donations and then reinvested in income-producing assets, such as commercial real estate. 

Institutional investors focus on larger investments and strive to buy assets that don’t require any work. Since they go for large, Class A+ properties, they’re often “picture perfect” with little risk of deterioration or becoming outdated. 

Institutional investors can secure substantial purchases and access investment opportunities that the general public cannot. As such, they’re not interested in purchasing single-family homes. However, if they can purchase 200 single-family homes bundled together near a major university, they will. 

Unfortunately, that’s how and why many renters and homebuyers are affected by institutional investors today. So let’s discuss how these large investors are impacting potential homebuyers, landlords, and tenants today.

How These Big Companies Are Changing the Rental Market

The housing market has never seen higher home prices than right now. Over the past few years, demand for housing has risen, and inventory has continuously fallen short. Unfortunately, this has created a dramatic rise in prices, affecting everyone needing housing. 

institutional-investors

Although most people dream of purchasing a home someday, it’s becoming more unattainable as prices continue to rise and demand decreases. That said, rental costs have increased as well, with rental rates reaching a record high in early 2022.

As a result, fewer people can afford to buy homes and pay rent. But what’s contributing to the lack of supply? Institutional real estate investors are.

According to a Redfin analysis, institutional real estate investors purchased around 18.2% of US homes in the third quarter of 2021. This means fewer people could get their hands on a home due to competing with large investors. 

As you can imagine, this puts smaller investors at risk and lowers the chances of people securing a home. 

The Effects on Tenants and Small Landlords

Although institutional real estate investors typically focus on large investments like offices and retail buildings, it’s becoming more common for them to buy many rental properties. Unfortunately, this has some major effects on smaller landlords, tenants, and property managers. 

As you can imagine, if you’re a smaller landlord going up against an institutional investor for a property, your chances of winning it aren’t very high. Additionally, many large investors can snatch up these properties before they even hit the market. 

effects-on-investors

For example, in 2020, a large private equity firm, Blackstone, acquired a large real estate investment trust, Preferred Apartment Communities, which owns 44 multifamily communities and around 12,000 housing units in the Southeastern US, for about $6 billion. 

This limits smaller investors and homebuying opportunities for those who want to get out of rental properties. Unfortunately, smaller landlords are affected the most. After all, how can you win a property when there’s a larger investor up against you? 

In turn, this can affect how you manage your properties. Luckily, rental property management in Northern Virginia is here to help you keep your investments safe. 

Keep Your Investments Safe with Property Management

If you’re looking to grow your rental business, it’s important to do your research and outsource some of your tasks. After all, if you own several rentals, it’s hard to handle tenant relations, perform maintenance, and write up contracts for each one. Luckily, you don’t have to. 

Professional Property Management in Northern Virginia has the expertise and professionals to help you manage your rental business easily. We can handle tenant screening, maintenance requests, rent collection, and much more. Contact PPM today if you need rental management services in Northern Virginia.



Leave a Reply

Your email address will not be published.