The Role of REITs in U.S. Housing:

The Role of REITs in U.S. Housing:

In recent years the American housing market has been shaped not only by traditional home-buyers and developers, but also by a growing institutional presence. One of the key players in this shift is the sector of real estate investment trusts (REITs). 

These vehicles—organized as companies that own, operate or finance income-producing real estate—have expanded their reach into U.S. residential housing in ways that raise important questions about supply, affordability, investment and home-ownership trends.

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In the residential housing industry, what are REITs and how do they operate?

• Definition and tax system

A corporation, trust, or association that invests in real estate and satisfies specific operating and tax criteria is known as a real estate investment trust (REIT). For example, the business must distribute at least 90% of taxable income to shareholders as dividends and earn at least 75% of its gross income from real estate-related activities in order to be eligible as a REIT in the United States.

REITs therefore offer a vehicle for investors to gain exposure to real estate—commercial, multifamily, residential, single-family rentals—without directly buying individual properties.

• Residential REITs: segments and growth

Within the residential housing segment, REITs typically take two main forms: (1) multifamily/apartment housing (equity REITs owning large apartment complexes) and (2) single-family rental (SFR) REITs, which own and manage single-family homes as rentals.

A 2023 article from the Federal Reserve Bank of Philadelphia (“The Rise of the Single-Family REIT”) found that although SFR REITs are still relatively small in the overall U.S. housing stock, they have grown rapidly in certain markets.

How big is the impact of REITs in U.S. housing?

• Growth patterns

The rise of residential REITs has been noticeable, especially post-2008, as institutional investors sought rental-housing exposure. For SFR REITs, the jump from near-zero holdings in 2010 to tens of thousands by 2020 is significant.

• Market share and concentration

Despite the growth, residential REITs still represent a small fraction of the entire U.S. housing stock. The Philadelphia Fed report noted that SFR REITs held about 0.2 % of all single-family homes by 2020—but in some localised neighbourhoods, their share may approach 5 %.

The influence of REITs on housing supply, affordability and home-ownership

• Rental-supply augmentation

One of the key ways REITs affect the housing market is by increasing the professional rental-housing supply.

That can be beneficial in markets where home-ownership is out of reach and rental demand is high.

• Impact on affordability

However, the impact on affordability is contested. On one hand, by expanding rental supply, REITs may ease pressure on tight housing markets and provide alternatives to buying. 

On the other hand, critics argue that in buying properties with cash and out-bidding individual buyers, especially in hot markets, SFR REITs may push up home-prices and further restrict individual home-ownership opportunities.

Multifamily / Apartment-focused residential REITs

Beyond single-family homes, a significant portion of residential REIT activity is in the multifamily/apartment segment. These REITs own large apartment complexes or portfolios that cater to urban or suburban renters. Some key points:

• Demand for apartment housing has remained resilient, particularly given high home-prices, elevated mortgage rates, and shifting preferences among millennials and younger households.
• A recent news report noted that apartment-REIT stocks (segment of the broader REIT index) were outperforming many other REIT categories, because a tough housing market has spurred rental demand and kept tenant turnover lower.
• Apartment REITs can benefit from scale, professional management, amenity offerings, and location advantages.

Looking ahead: What does the future hold for REITs in U.S. housing?

• Trends to watch

• Interest-rate momentum: As borrowing costs evolve, the margin for housing REITs will be impacted. Lower interest rates could spur more acquisitions and growth; higher rates tighten the environment.
• Supply constraints: In many regions of the U.S., housing supply remains constrained (land‐use regulation, labour/contractor shortages, materials costs). That may provide favourable tailwinds for rental housing and REITs.
• Demographic shifts: Millennials advancing to peak renting/owning age, Gen Z entering the rental market, and aging baby-boomers changing housing needs (downsizing, senior rentals) will shape demand profiles. REITs may tailor portfolios accordingly.

• Principal obstacles

• Managing concentration risk: As REITs expand, concentration in specific markets could expose them to localized downturns or regulatory backlash.
• Balancing yield and affordability: While REITs aim for yield, community and policy goals often emphasise affordability and tenant protections. Finding the balance is crucial.
• Competition for acquisitions: As more institutions, not just REITs, move into rental housing, competition for acquisition targets may compress yields or push REITs into less core markets.

• Strategic opportunities

For those in the housing and investment space:

• Markets with constrained supply and strong rental demand may offer opportunity for REIT investment and growth.
• First-time buyer assistance programs and public-private partnerships may enable REITs and institutional investors to participate in affordable rental or mixed-use housing development.
• Innovations in housing models (co-living, modular construction, mixed-family/senior combined housing) may be embraced by REITs looking for yield and differentiation.

In conclusion: The Role of REITs in U.S. Housing

REITs are becoming more and more significant in the housing market in the United States. 

In a sector that has historically been dominated by individual homeowners and small landlords, REITs represent an increasing institutional presence, ranging from single-family rental portfolios to massive multifamily apartment complexes.

On the plus side, they offer potential for rental-housing supply, scalability, professionalism, and liquidity. 

They provide investors with easily accessible exposure to dividend income, diversity, and real estate returns. In congested housing markets, institutional rental supply could assist satisfy demand.

However, there are important ramifications for neighborhood dynamics, affordability, and house ownership. 

In some locales, institutional acquisition of single-family homes may reduce opportunities for individual buyers and push up prices. As the rental share of housing grows, the pathway to owning may change for many households.

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