The Institutionalization of an Emerging Asset Class: The Origin Story of Invitation Homes
In a landmark event, two of the nation’s leading owners of single-family rental homes announced a merger today. Starwood Waypoint Homes, formerly Colony Starwood Homes, is officially merging with Invitation Homes, creating the largest single-family rental platform in the world — by a wide margin — and sending a strong signal of the growing strength and stability of the single-family rental business. Until recently, this entire asset class was merely a cottage industry. So what happened to precipitate this unique moment in real estate history? In light of my role as a co-founder of Invitation Homes, this feels like an opportune time to rehash both the nexus and the rapid institutionalization of the broader single-family rental industry.
When the U.S. housing market crashed in 2008, it decimated the U.S. economy and sent shockwaves throughout the world. It was the single biggest economic implosion since the Great Depression. Financial markets were upended, the largest banks folded, entire governments teetered on the edge of bankruptcy, and the economic growth engine of the last decade seemed to be durably derailed with no end in sight. It took nearly eight years for the market to return to a ‘new normal’.
Comparatively, when the tech bubble of the late 1990s burst, the economy bounced back in a mere two years. While certainly devastating and equally as sudden, the bursting of the tech bubble didn’t shatter the U.S. economy. The banks didn’t fold, mass unemployment didn’t result, and there was no federal TARP program to rescue the fallen internet dot coms. This contrast in both recovery duration and public policy response underscores just how fundamental the residential housing market is to our entire national and indeed global economy.
Real estate capital markets are in fact the largest capital markets — larger than the stock market and debt markets themselves! — and the bedrock of any modern economy and financial system. As such, making real estate capital markets more efficient and transparent has potential to not only generate outsized returns for investors, but also to have a profound impact on our society, our collective financial well-being, and the stability and growth of the entire U.S. economy.
Bringing Down the House
Before co-founding Fifth Wall, I co-founded a single-family rental company called Invitation Homes (“IH”). What started as an idea in my mind and those of seven co-founders in 2011 quickly became arguably one of the largest seed round investments ever, with over $1 billion committed by Blackstone to launch our first market in April of 2012. We quickly amassed over 50,000 single-family homes for lease in 13 markets across the country, allocating billions of dollars of capital. This culminated in January 2017, when IH raised $1.5 billion in an initial public offering on the New York Stock Exchange, bringing our total market capitalization to nearly $7 billion.
Our success in no small way owes itself to the institutionalization of multi-family housing in the early 1990s. Prior to this time, the vast majority of apartment buildings in the U.S. were owned by “mom & pop” outfits. When the real estate market collapsed in 1989, institutional capital flooded the market, aggregating large pools of distressed apartment stock from the Resolution Trust Corporation, which the federal government had created to mop up the real estate mess left from the savings-and-loan debacle. With sophisticated and well-funded ownership groups, professionally managed apartment properties became ubiquitous, and one could secure 24-hour a day service and a superintendent at your door at the drop of a hat. Knowing full well that history tends to repeat itself, and in the throes of a similar real estate crisis, we were left asking ourselves: “why couldn’t we do that with single-family housing?”
In 2010, housing prices fell to all-time lows and investors began to ideate around how to deploy private capital to solve an intractable public sector challenge — that is, how to unleash and enable the economy to help the housing markets recover on its own. Despite the influx of outward government buttressing and targeted capital outlays, the housing market was persistently anemic even two years after the housing crash.
Betting Big on the U.S. Housing Market
Enter Invitation Homes. By aggressively investing capital in the purchase of foreclosed single-family homes, our team realized we could quickly identify, underwrite, buy, and fix up distressed assets, helping turn community eyesores and the blight they generated into aesthetically pleasing, investment-grade assets that would ultimately attract renters and bring a foregone vibrancy back to those neighborhoods. It also created a capital floor, giving homeowners the price buoyancy that helped them feel more comfortable selling their homes. In this instance, private markets were present and prepared to deliver economic assistance in ways that the government would not or could not in the height of crisis. IH was thusly born from this need and built on this new institutional business model, buying distressed single-family homes in partnership with our sole equity provider Blackstone, in expectation of returns to our investors and to the communities of which we are a part.
The Secret to Our Success
Warren Buffett was quoted saying: “If I had a way of buying a couple hundred thousand single-family homes and if I had a way of managing them…, I would load up on them” (Buffett, February 12, 2012). In hindsight, our idea seemed fairly straightforward — but like most contrarian bets, things hadn’t appeared quite as obvious back in 2010. We were met with extreme skepticism by the majority of investors we approached with our thesis, most of whom questioned our market timing, our ability to effectively acquire homes at scale, or how we could ever possibly manage a geographically dispersed portfolio efficiently. Even in situations where investors liked the idea, their willingness to act was muted based on a lack of proven ways to monetize their conviction.
So what convinced our capital partner and the handful of others to enter the space when their peers would not? In short, technology. We fundamentally believed we could use technology to enable a best-in-class team to identify, underwrite, purchase, renovate, and professionally lease/manage U.S. single-family rental homes across the country at scale.
This foresight turned out to be true as technology opened a window to capture this unique opportunity, execute on our ambitious strategy, birthed a multi-billion dollar industry, and forever changed the paradigm of how Americans access housing stock.
IH’s distinct tech stack allowed us to scale teams across markets exceptionally quickly, enabling us to responsibly purchase and effectively manage thousands of quality homes for rent. We innovated at each phase of a single-family rental home’s lifecycle, which became part of our clear competitive advantage. Some of these unique mobile enabled innovations include: underwriting & bidding software; contractor & vendor management tools; rehab budget tracking & inspection software; customized workflow management & communication tools across different business functions; intelligent maintenance routing; scheduling & reporting tools; easy online payment system; advanced BI analytics platform; and numerous API integrations, to name a few.
When Worlds Collide
In summary, we built a technology platform that didn’t just become a useful tool; rather, it became existential to the success of our business. Without it, our ability to grow beyond a certain scale would have been untenable. Furthermore, our success illustrated an even more important point: the collision of traditional real estate and technology is creating incredible opportunity that, when properly understood and utilized, can produce massive outcomes in a short amount of time. Our particular opportunity resulted in the purchase of over 50,000 homes in less than 36 months, allocating close to $10 billion of capital. (Of particular note: at our prime we were purchasing $150M of homes per week!)
Yet, as pioneering as it seemed at the time, I truly believe this is only the beginning and perhaps one of driving theses at the core of founding Fifth Wall. Where we saw so much untapped, unclaimed opportunity at the intersection of these two industries, we opted to create Fifth Wall as a platform to promote and support companies who were best positioned to take full advantage of shifting tectonics and fresh dynamism in the rapidly changing real estate landscape. Indeed, our initial set of investments are very much in line with this viewpoint: from the ever-expanding short-term rental economy, to on-demand self-storage, on-demand fitness, retail as a service, workplace as a service, or residential transaction marketplaces. The future, to us, is well underway and we’re excited to invest in the teams and technologies that will be responsible for redefining the next-generation of Built World companies.
Invitation Homes and the single-family rental market revolutionized home optionality and accessibility for a diverse array of demographics ranging from Millennials to retirees. This methodology — the application of technology to otherwise orthodox asset classes — will relentlessly democratize other industries and will certainly continue to mint entirely new asset classes. We’re all perhaps better for it, and at Fifth Wall, we stand prepared and wholeheartedly committed to embrace that ambitious charge and lead that ambitious change.
