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Saturday, Sep 23, 2023

Rental Houses for Middle-Aged Millennials

American Homes 4 Rent plans to reinvent itself for the next stage of U.S. economic growth – which it believes will involve millennials becoming home renters. In May, the Agoura Hills real estate investment trust, in a joint venture with J.P. Morgan Asset Management, launched its first project to build 34 single-family homes in the Sovana and Spring Valley neighborhoods of Las Vegas. The project will entail 12 three-bedroom homes and 22 four-bedroom homes, with the first ready for occupany later this month. Completion of all 34 homes is anticipated for October. The Las Vegas project is the first manifestation of a partnership with J.P Morgan Asset Management, which has fronted $625 million of equity to build 2,500 single-family rental homes throughout Western and Southeastern United States, at roughly $250,000 per home. But unlike traditional homebuilders, the joint venture will build these houses as long-term rentals, not for sale. American Homes 4 Rent was founded in 2012 by B. Wayne Hughes, the entrepreneur behind two other Valley-region publicly traded companies: Public Storage and PS Business Parks, both in Glendale. The company raised capital in the depths of the Great Recession to buy homes at attractive prices and rent them. According to filings with the Securities and Exchange Commission, as of March 31, American Homes 4 Rent owned 52,776 single-family properties in 22 states. Monthly rental rates range from $1,700 to $6,000, depending on the market, according to the company’s website. But with home prices now much higher than in 2012, adding to the company’s inventory has become expensive. The build-to-rent strategy offers a new avenue for growth. In February, the company entered into a $253 million strategic joint venture with institutional investors advised by J.P. Morgan Asset Management to focus on constructing and operating newly built rental homes, according to SEC filings. Later, the parties enlarged the deal to $625 million. “American Homes 4 Rent holds a 20 percent unconsolidated interest in the joint venture, which has an evergreen term,” the filing stated. “Additionally, the company will earn fees for development and management services provided to the venture and have an opportunity to earn a promoted interest after construction and initial operation of the venture’s properties.” Millennial angle Mike Kelly, head of Real Estate Americas at J.P. Morgan Asset Management, said in a statement that the joint venture aims to capitalize on the increasing number of people leaving cities in search of more space and higher-quality living in the suburbs. “We see this shift as particularly prevalent among the millennial generation, the largest U.S. age cohort, who are looking to transition away from apartment living,” Kelly said. “The move towards more spread-out living is also expected to accelerate in the wake of the COVID-19 pandemic, and we anticipate strong occupancy and rental growth rates across properties.” Although this thesis runs counter to the assumption that millennials love city living, other experts agree that for aging millennials, the live-work-play, non-commute way of life in urban luxury apartments may lose its luster in the next few years. John Loper, associate professor of real estate at USC’s Los Angeles campus’ Sol Price School of Public Policy, said that as millennials age out and start families, they are realizing as a generation that the apartment life may not be ideal after all. “Those apartments are not working with a 2-year-old,” he said, while options such as American 4 Home Rent’s single-family home rentals are more in their budget. “They’re more family friendly (and ideal) because they’ve been renters by choice, they’re willing to rent,” Loper said, explaining how they may not have enough money for a down payment to purchase a house outright in today’s inflated real estate market. “They’re starting to look for things they grew up with. But because of their jobs, they don’t have the financial wherewithal to buy a house,” Loper said. In fact, the trend toward houses has been long-running and the home rental market has been getting stronger as a result, according to Loper, who, by example, points to the popularity of the 2- and 3-bedroom townhomes offered by the James Irvine Co. in Irvine or by Lewis Group of Cos. in the Inland Empire. “In these master-planned communities,” Loper continued, “you have all the advantages of onsite amenities that the millennials have been used to in their apartment complexes.” On top of all of this comes the impact of the pandemic. “I’m hearing that because of COVID, there’s going to be more of this moving into neighborhoods with less density, without an elevator that they have to share,” Loper said. Rent collection Despite the COVID-19-induced economic shutdown, American Homes 4 Rent was able to collect 95 percent of its rent in April and 82 percent in May and was cautiously optimistic about subsequent months moving deeper into the economic recession. “Our property managers have been in constant contact with our residents during this crisis, including those who are having financial difficulties.” Chief Executive David Singelyn said in a conference call. A representative of American Homes 4 Rent was not available to talk with the Business Journal by press time. Singelyn added that the firm’s portfolio diversification across 35 markets will partly offset any damage from the crisis as it “makes us less susceptible to severe-impacted market as our largest individual market represents less than 10 percent of our total portfolio.” In its annual report, American Homes 4 Rent said it has become a leader in single-home rentals “by aggregating a geographically diversified portfolio of high-quality single-family homes and developing ‘American Homes 4 Rent’ into a nationally recognized brand.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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