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Waterton makes single-family rental debut with tech-focused JV

The Chicago-based residential and hospitality firm is partnering with sector specialist Second Avenue to source opportunities.

Chicago-based Waterton, a US-focused multifamily senior living and hospitality manager, has formed a $500 million joint venture with Tampa-based single-family rental specialist Second Avenue to enter the red-hot niche sector.

The venture will look to both acquire and develop single-family assets in the southeastern and southwestern US. The majority of the capital will be deployed from one of Waterton’s value-added funds, the most recent of which – Waterton Residential Property Venture XIV – closed last year with $1.5 billion in capital commitments, per PERE data. Despite increased appetite for single-family rentals, the niche sector is still in the process of institutionalizing. The market could be worth around $3.5 trillion, Waterton CEO and chairman David Schwartz told PERE, with only around 2 percent of that owned by institutions.

“There’s a lot more runway,” Schwartz said. “We wanted to enter the SFR space where we could pursue multiple strategies.”

The “three legs of the stool” in Waterton’s SFR strategy are building large-scale communities, developing small portfolios and acquiring small portfolios. Second Avenue’s technology application allows it to source and underwrite deals as well as track rehabilitation and construction projects, CEO and managing partner Michael Rothman said.

Second Avenue is backed by former Invitation Homes CEO Fred Tuomi, who serves as a special adviser to the firm. Tuomi previously was the president and CEO of Starwood Waypoint Homes, the merger of Starwood Capital Group and Colony Capital’s REIT offerings in the space. Second Avenue was the first investment in Tuomi’s personal portfolio and remains his largest to date.

Given the speedy growth of the single-family space, having a tool to manage large portfolios was going to be necessary, Tuomi said of backing Second Avenue. The wall of capital chasing single-family homes was estimated to be $82 billion in January, according to housing analysis firm Zelman & Associates. Around $45 billion was deployed into the sector last year, per data from consultancy John Burns Real Estate Consulting.

The Waterton venture plans to differentiate itself in the increasingly crowded single-family rental market through the types of homes in which it invests. Affordability is a key driver, so homes currently valued between $250,000 and $350,000 are its sweet spot. Rents in those properties will range between $1,800 and $2,500 per month depending on the market, targeting rent growth of around 3 percent annually, Rothman said. Second Avenue will employ use in-house technology a competitive advantage, creating a one-stop shop for tenants to pay rent, manage maintenance and source other properties that may be of interest.

Waterton and Second Avenue are banking on the combination of affordability and an institutional approach driving performance in their venture.

“The turnover rates in SFR used to be 30 percent. Now [turnover rates in] SFR owned by the big institutions are down to 20 percent or lower. People are staying longer,” Rothman said. “You look at all the institutions, they’re at 97 percent occupancy. Occupancy is really high. That then gives you better yields.”