Berkadia Investment Sales has long been active in the single-family rental (SFR) market, and our activity in the space has accelerated over the last 18 months given demographics shifts partially boosted by the pandemic sending renters looking for more space at home and greater affordability. Concurrently, we’ve seen the further surge of build-for-rent (BFR) communities, with developers now including single family home builders accelerating BFR communities from the ground up.
As more and more developers and investors expand into the SFR/BFR market, we sat down with Berkadia experts Senior Managing Director Mark Forrester and Managing Director Joel Kirstein to understand how the SFR/BFR landscape has changed, what makes the segment unique from traditional multifamily and what they’re most excited about for its future.
It feels like SFR/BFR blew up in the pandemic—now it seems everyone is talking about (and investing in) it! Why did the sector gain so much steam in the past year?
Mark Forrester (MF): The truth is, SFR has been around for a while. Berkadia has been an early mover in the SFR space—we began selling and financing SFR communities in 2012. The Great Recession spurred the first wave of broader interest in SFR, with groups like Invitation Homes and traditional apartments investors starting to buy distressed houses and new townhome properties originally envisioned as “for Sale” as rental properties. Since then, we’ve seen a movement toward more focused SFR communities that mimic some of the amenities of traditional multifamily within standalone or townhome property communities.
With the pandemic, we saw a convergence of factors impacting renter preferences—more work from flexibility, a desire for more space and affordability, etc.—that made the SFR market even more attractive, spurring the tremendous growth we’ve seen in the last 18 months and the even greater focus on BFR community development.
JK: As Mark mentioned, the pandemic amplified some trends in renter preferences that, combined with the national housing shortage and rise in single-family home costs, created the perfect environment for growth. However, though the pandemic may have accelerated growth, this sector isn’t a pandemic-related flash in the pan. SFR/BFR is underpinned by strong fundamentals, strong demand and has demonstrated resilience and value over the course of the pandemic. It is a sector that is here to stay.
With SFR/BFR a sector that we expect to be here for the long-term, what do new investors in the market need to know? Are there any unique challenges?
MF: In many ways, SFR/BFR mirrors the traditional multifamily space. It falls into a few different categories—horizontal, townhome and true single family—each with its own unique operational approaches and expenses that necessarily differ from traditional multifamily. There’s certainly a learning curve, but there are other advantages—effective rents are normally higher, operating costs and turnover tends to be lower; other income packages tend to be higher—that increase value and efficiency. Moreover, SFR /BTR assets typically sell at similar CAP rates when compared with traditional multifamily communities.
JK: A very specific consideration for the sector, especially as we see more BFR underway, is land entitlement. Unlike traditional multifamily, you can’t build 400 units, and entitlement and zoning play a huge role in accomplishing these projects. We’ve worked with a number of clients to secure land specifically designed for SFR/BFR to help them navigate what can be a tricky transaction.
Although Berkadia’s teams have been doing this work for a long time, but this sector is still very new. What are you most excited about when you think about the future of the SFR/BFR market?
JK: Certainly, we’re excited to see more investors recognize the value of SFR/BFR and to help them enter the space, but one thing I’m particularly excited about is the potential of SFR, and really BFR, to help us achieve new heights in Environmental, Social, and Governance (ESG) investing.
We’re already starting to see developers implement some really impressive sustainability components in ground-up projects, pursuing new construction methods that dramatically improve energy efficiency and mitigate environmental impacts. Additionally, from the social perspective, SFR/BFR can provide workforce housing solutions, which is a critical component in tackling America’s affordable housing crisis.
These efforts are really just scratching the surface of the ways we think SFR/BFR can align with the increased focus on ESG from the investor community and help to achieve these worthy goals, especially in a way that can be measured.
MF: We’re still in the early stages of this part of business so we’re excited to see where this sector will go. With the resiliency SFR/BFR has demonstrated in the pandemic, the increasing preference toward renting across the population and ever-widening universe of interested buyers, the sky is truly the limit.
To learn more about Berkadia’s experience in SFR/BFR, click here.
-Joel Kirstein, Managing Director