More companies are entering the single-family home rental market as institutional investors clamor to expand their portfolios, setting up the relatively new industry for what is expected to be major consolidation.

The single-family rental market has evolved rapidly in the past decade, transforming a traditionally mom-and-pop business into a commercial real estate sector luring large investors seeking stable returns. Like multifamily decades ago, single-family home rentals are evolving into a new asset class proven to be as profitable and underwritten as other types of commercial property.

In the case of Dallas-based Invitation Homes, the largest U.S. landlord of single-family home rentals with 80,330 houses, the size of its business coupled with its decade of experience has helped the publicly traded company secure the No. 1 ranking. In the past year, some rivals of Invitation Homes, fueled by billions of dollars from investors, have been merging forces to gain scale.

"Nothing is easy in business, especially when it's an attractive segment for investors, with a lot more eyeballs on it than years ago," said Invitation Homes President and CEO Dallas Tanner, who co-founded the company in 2012 with funds from the real estate investment trust of private equity firm Blackstone Group.

Blackstone sold off its stake in Invitation Homes for more than $1.7 billion in November 2019 but decided it should re-enter the single-family home rental sector last year with a $300 million investment in Toronto-based Tricon Residential. Blackstone boosted its stake in the industry this week with a $6 billion deal to buy Home Partners of America, which owns more than 17,000 single-family rentals.

The term single-family rental homes can encompass a housing development built specifically as a rental community or include institutional owners working out deals with builders to buy existing single-family buildings. It's considered a desirable investment because the resident in a single-family rental home has a 75% to 80% renewal rate and stays in the home for three years, twice as long as residents in apartments, Tanner said.

The single-family rental market, particularly the segment of it centered on whole neighborhoods made up of homes built to rent, is the focus of companies forming new groups to develop rentals and platforms that serve them. These companies are looking to take advantage of a limited U.S. supply that is contributing to rising rents, renewals and numbers of renters as single-family home prices have been near record highs.

Institutional investors make up less than 2% of the single-family U.S. home rental industry, with most landlords, or about 85%, being mom-and-pop investors with fewer than 10 homes in their portfolios, according to a report from single-family landlord and financial firm Amherst Residential.

So many private investors dicing up the industry has helped keep regulators at bay. But if consolidation continues, it could be a risk to investors moving forward. Other investment risks include the creeping costs of property taxes, insurance and construction, as well as local governments putting rent controls or eviction moratoriums in place and homeowners associations that could seek to restrict renters or rental properties in certain neighborhoods.

Even so, the past year has been a busy one for investors looking to bank on the industry: Brookfield Asset Management bought a controlling interest in single-family rental landlord Conrex, which is also known as Connorex-Lucinda; Pacific Life Insurance invested hundreds of millions of dollars into Tricon Residential; and JPMorgan Asset Management poured funds into American Homes 4 Rent.

With so many big players expanding their single-family home rental portfolios, these properties could drive more industry mergers, said Michael Finch, an executive vice president and principal at Phoenix-based SVN | SFRhub Advisors, the nation’s only exclusively single-family home rental brokerage.

"This industry is ripe for aggregation and consolidation," Finch told CoStar News. "We have been seeing rapid merger and acquisition activity, and that will only continue. I think we'll see only a handful of groups of any true significant scale as they continue to consolidate."

With limited housing inventory in the United States, especially in hot markets like the Sun Belt, which has seen an influx of migration in the pandemic, Finch said he expects the industry to add millions of new single-family rental homes, with new construction catering to the renter-by-choice resident who wants to be in a new home.

Besides development, brokerages, lenders and third-party management companies are looking to put together their own platforms to get a piece of the single-family home rental pie.

"All the big brokerage firms are trying to get in on it," Finch said. "We've been pioneering in this field since 2014 and welcome the competition, but there's a lot that goes into building a great platform. It's not just the multiple listing service and rents that go into it — a lot of work goes into underwriting these portfolios."

With single-family home rentals outperforming traditional commercial real estate, including office and retail, Michael Carey, a senior director at Altus Group, a Toronto-based advisory firm valuing single-family rental home portfolios, said investors are following those returns.

"Eighteen months ago, our clients wanted us to appraise these properties, and right now we value over 7,000 homes each quarter," Carey said. "By the end of the year, we'll value over 10,000 homes each quarter, which is a sign of how this business has exploded."

In that time, Carey's firm has built up a database of home prices, rents collected and operating data specific to markets to help in the valuation and underwriting process. In expanding, Carey said his clients like to buy at least 750 homes in a new market with the ability to increase that to 1,500 homes. Investors are chasing preferred single-family home rental markets, including Atlanta, Dallas, Phoenix, and Tampa, Florida, but competition has driven some single-family rental investors to look at secondary markets such as Indianapolis and San Antonio, according to Altus Group.

"In the future, I think we'll be looking at a handful of large players with probably five companies with more than 100,000 homes in the next five years," Carey said, adding one of his undisclosed clients has a goal of buying a million homes in 10 years. "Like everything else, it's all about consolidation and who the big players will be."

The single-family home rental industry's evolution has led to new players looking to invest in the market and a race by rival firms to grow at a time when being the nation's biggest landlord has its advantages. Invitation Homes has landed stable, investment-grade credit ratings by Moody's Investors Service, Fitch Ratings and Standard & Poor's Rating Services, making it less risky for investors at a time when it plans to invest $1 billion into buying new homes for its portfolio this year.

"In the next decade we'll see aggregators build their portfolios of homes that residents are choosing to live in," Invitation Homes CEO Tanner told CoStar News. "We still want to grow, and we love the markets we are in and we have other markets we want to explore, but we want to build the right scale. Our goal is not to be the biggest but offer the best real estate experience."

For the first quarter, the areas comprising the most of Invitation Homes' revenue was Atlanta, Southern California and South Florida, according to an investor presentation.

Invitation Homes has more than 80,000 single-family homes for rent in its portfolio, making it the U.S. single-family home rental leader by more than 20,000 homes. However, as more private equity sees opportunity, even more consolidation could change what the leader board might look like in the future.

Invitation Homes reported year-over-year rent growth of 7.9% in the first quarter. That rental growth paired with the company's record-high occupancy rates and continued demand for homes has Tanner and his team believing "the tailwinds driving growth in our business and markets are stronger than they've ever been," with plans to continue building its portfolio and platform like its competitors.

With $1 billion set aside to buy single-family home rentals in the United States this year, Invitation Homes is looking to expand in its existing cities and some new ones, falling in line with some of its rivals betting on high-growth cities and regions.

The nation's second-largest landlord of single-family home rentals was created in January when Pretium Partners and Ares Management bought Front Yard Residential for $2.4 billion and folded it into Progress Residential. Progress Residential plans to expand this year into markets such as Austin, Texas; Columbus, Ohio; Denver, Colorado; Salt Lake City, Utah; and San Antonio, Texas.

Like Invitation Homes' portfolio, the bulk of Progress Residential's portfolio of about 60,000 homes was bought in one-off transactions through the multiple listing service or through brokers.

Invitation Homes and Progress Residential have not announced plans to build their own single-family rental homes. Invitation Homes has partnered with a half-dozen to a dozen builders to buy homes on a one-off basis at predetermined prices, but the real estate investment trust has no interest in taking on the risk of construction right now, Tanner said.

"We care a lot more about the location and where it is rather than if it's a brand-new house or a house that's five years old," he said. "We are channel agnostic, but location specific."