How the Financial Crisis Bred a Generation of Proptech Leaders
By Chava Gourarie January 21, 2020 11:23 amreprints
Lucas Haldeman boarded a plane with a duffel bag loaded with millions of dollars in cashier checks.
It was 2012, the foreclosure crisis was still in full swing, and he was on his way to Atlanta, where he and his team would participate in one of the greatest fire sales in American history.
In Georgia, foreclosure auctions take place on courthouse steps throughout the state on the first Tuesday of each month. Traditionally, the buyers milling about, brandishing clipboards and schmoozing in the sun, were local investors, ready to score a deal or two. But in the wake of the foreclosure crisis — with hundreds of thousands of distressed homes available at a discount — they were joined by institutional investors like Colony Capital’s new branch, Colony American Homes, where Haldeman was the chief technology and marketing officer.
“In the beginning, it was a lot of local [buyers] and a few private equity people,” said Haldeman. “Pretty quickly it became a lot of private equity people and a few local people.”
Other players in the space were Blackstone’s Invitation Homes, American Homes 4 Rent, upstart Waypoint Homes, and many others.
Invitation Homes’ bidders exchanged clipboards for iPads that came loaded with a proprietary app, what co-founder Brad Greiwe called the “red light, green light” model. Prior to the auction, Invitation Homes’ software would crunch the numbers and come up with a maximum bid for each property. When the address came up at auction, the app would show a green or red light.
“If it was green, you put your hand up,” Greiwe said. “When the bidding hit the strike price, it turned red, and you put your hand down.”
The combination of this kind of innovation, made possible by mobile and cloud technology and backed by the deep pockets of private equity behemoths like Blackstone, led to the rapid rise of the institutional single-family rental (SFR) market. The crisis provided the opportunity, and technology provided the necessary tool to leverage it.
The tech was paramount, said Greiwe. Those who leveraged it were able to scale, and scale was integral to reaching the operating efficiencies that would provide attractive returns. The tech made it possible to identify, underwrite, acquire, manage, and lease a distributed portfolio of single-family homes, located in diverse markets across the county.
In that sense, companies like Invitation Homes were the prototype for tech-enabled real estate companies. And, in fact, there’s a direct pipeline from SFR to today’s growing proptech sector. Once the SFR companies began to mature and go public, their alums began to take leading positions in proptech as investors, founders and venture capitalists.
Greiwe is better known today as the founder of Fifth Wall Ventures, a real estate-focused venture fund, and Haldeman is the founder of proptech company SmartRent, which was partially funded by RET Ventures, which counts Fred Tuomi, the current CEO of Invitation Homes, as a venture partner.
Other SFR alums pioneered online marketplaces for single-family homes, like Roofstock, Zillow Offers and Offerpad; the latter’s founder Jerry Coleman was a co-founder of Invitation Homes.
For many, the trajectory from SFR to proptech was driven by the desire to solve a pain point that cropped up in their business. Gary Beasley started Roofstock when he realized that there was no good way to sell occupied homes. Haldeman was looking for an enterprise smart home supplier while at Colony, and when he couldn’t find one, he started SmartRent with the blessing of Colony CEO Tom Barrack himself.
Greiwe, on the other hand, started Fifth Wall because he saw the power of combining technology with real estate.
“I had a front-row seat to what could happen when tech and real estate were married,” he said. “I wanted to be a steward of that.”
Wall Street’s entrance into single-family rentals was one of the more significant and enduring impacts of the housing crisis. Over the last decade, the institutionalization and financialization of this new asset class has solidified. Now valued at roughly $30 billion, institutional SFR companies own about 200,000 homes, or roughly 1.5 percent of the market.
A series of mergers and acquisitions have consolidated some of the sector’s early players into Invitation Homes, which remains the largest publicly traded SFR company. In 2017, Invitation Homes went public with a 48,000-unit portfolio and was valued at more than $12 billion. It merged shortly after with Colony American Homes, which had previously incorporated Starwood Waypoint Homes, bringing its total portfolio to 80,000 units in 17 markets, per the latest quarterly report.
From the start of the housing collapse, companies began to amass portfolios that were at the time considered large. Gregor Watson and Beasley, two California boys who are now the heads of Roofstock, both started in single-family rentals early. Beasley was the CEO of Waypoint Homes, and Watson founded 643 Capital, both of which were regional SFR players that launched in 2008.
“People didn’t even know if we could pick up the rent check,” said Watson. That’s how untested it was.
Waypoint was one of the first to attract institutional capital, with a $250 million loan from GI Capital in 2011, and had acquired around 1,000 homes by that time. It was the entrance of Invitation Homes in 2011 that took things to the next level. Greiwe and his co-founders approached Blackstone with a business plan in which they packaged an existing regional SFR player, a management company with national exposure and a team of agile tech and real estate talent. Blackstone agreed to seed the company with $1 billion, and it launched in 14 markets simultaneously.
“We were the first owner to get to 1,000 homes,” said Beasley. “By the end of 2012, Invitation Homes was buying 1,000 homes a week.”
“We’d buy six or seven homes in a day and people thought we were a big deal,” echoed Watson. “Then Blackstone came in and bought every home.”
In retrospect, it seems obvious that the housing collapse offered a tremendous opportunity for anyone with enough capital to take advantage of it, but the bigger companies weren’t allocating money to buying single-family homes, said Greiwe. Managing a distributed portfolio of single-family rentals was an untested business, and most traditional players were skeptical that it could be done.
“There was a lot of skepticism in the market, whether it was going to be a business or a trade,” said Daniel Tegen, an executive at Kroll Bond Rating Agency, and an expert on the single-family market. Most assumed the companies would sell off the homes once the market recovered and didn’t believe that operating single-family rentals was a sustainable business, he said.
“We were able to see how tech could build real-time solutions that a lot of people viewed as impossible,” said Greiwe. “But most traditional real estate owner-operators didn’t understand how to take advantage of that.”
The first quarter of 2012 was a turning point for the housing market, and prices began to rise. By then, private equity money was pouring into single-family rentals, and teams at each of the companies were still figuring out how in fact to operate a dispersed portfolio.
“It attracted the renegades and the rogues,” said Greiwe. “Most of them had real estate backgrounds, [but] were scrappy enough … and were not blinded by 1+1 = 2.”
Haldeman said the SFR arm had a different atmosphere than you’d expect from a corporate juggernaut like Colony.
“Inside of that, we felt like a startup,” he said. The challenge of building something that many thought was impossible was part of the attraction.
The next stage for the institutionalization of SFR came in 2013, when Invitation Homes issued the first single-family rental backed security for $500 million.
“It was the first securitization of its kind,” said Kroll’s Tegen, with the bonds backed by income generated from single-family homes. To date, there have been 45 SFR-backed securitizations, Tegen said.
From there it was a relatively short path to the full institutionalization of the market, with Starwood (which had merged with Waypoint Homes), American Homes 4 Rent, Colony and Blackstone all going public by 2017.
While technology was crucial in creating the institutional market, it’s important to recall that its rise didn’t occur in a vacuum.
The federal government and the regulatory environment facilitated its growth, argues Maya Abood in “Securitizing Suburbia,” an analysis of the SFR space. While the federal government was not directly involved in single-family rentals, it actively sought to partner with private equity in the aftermath of the crisis. Under the Single-Family Loan Auction Program, the federal government sold billions of dollars of discounted home loans to Wall Street firms, and many of those homes were later put on the auction block for institutional investors to buy at discount. In addition, the SFR market is only possible because of financial innovations such as REITs and asset-backed securities.
The long-term effects of the institutionalization of white-picket homes is not yet clear, especially since at the moment, institutionally owned homes comprise less than 2 percent of the country’s 15 million single-family rentals.
Since the recession, homeownership has declined, and single-family rentals have increased. Many of the SFR companies tout behavioral and generational changes to explain this shift, claiming that millennials appreciate the more flexible lifestyle, but others have been more critical of the way that institutional money has impacted the housing economy.
In effect, the SFR market represents $30 billion in value that was shifted from families or mom-and-pop investors to corporate giants.
In addition, studies and media reports have shown that institutional landlords are more likely to evict, have shifted operational costs to renters, and crowd out prospective homeowners who are unable to compete with deep institutional pockets. But there’s another way to look at it, said Beasley.
“If you rewind back to 2009, you had millions of people who had been displaced, who needed a place to live, not through the fault of anyone in the industry. Many of these homes were abandoned, and private capital came in, kicked out the squatters, and provided clean, well-managed housing stock,” he said.
“There’s no right or wrong answer to that,” he added. “I think it’s just part of the evolution of that industry.”
Many of the entrepreneurs who built the system have moved on. Haldeman, Beasley, and Greiwe all said that once their companies went public, and lost the entrepreneurial spirit, they were ready for a new challenge.