On April 5, we proudly hosted the Berkadia Beyond Insights Webinar: Why Investor Interest in Single-Family Rental & Built-for-Rent Continues. Real estate consulting expert John Burns, CEO of John Burns Research and Consulting, discussed the banking crisis, recession thesis, housing demand and investment financing. Today, we sit down with Jeff Coles, Berkadia VP – Client Services, to recap the webinar and what the major takeaways are for the Single-Family Rental (SFR) and Build-for-Rent (BFR) industry.
What are the long-term factors that may sustain this new asset class?
There are several drivers in the SFR and BFR industry which will sustain its growth and adoption:
- Shortage of housing: Due to accelerated population growth, there is a need for two-five million more housing units in US (depending on source).
- Demographic shift: Millennials are renters by choice and transient in nature. Millennials own 4 percent of real estate value in the US — When baby boomers were that age, they owned 32 percent of the country’s real estate value.
- Hybrid work environment: As a result of the Pandemic, the shift to a hybrid or work-from-home environment requires more space – particularly for married couples who each require a dedicated workspace. It is believed hybrid work policies are here to stay.
- Housing affordability: First-time homebuyers will pay 39 percent more than first-time homebuyers did nearly 40 years ago. Millennials are crippled by debt and are financially behind, due to the fallout of the GFC leading to difficulties in saving for housing.
- Shifting consumer practices: Whether it is due to affordability or preference, we are becoming a nation of commitment-free consumers who find it more appealing to lease instead of own. Items we used to purchase that we now prefer to lease include mobile phones, music, automobiles, furniture, and many other consumer products. Our housing has naturally fell in line.
What are the top three amenities for Build-for-Rent tenants?
Build-for-Rent tenants are seeking a rental experience similar to conventional apartments, but not necessarily have all the traditional common area amenities (clubhouse, business center, gym). Most want the assurance of good property management and additional space. The top three amenities that create a “stickier” tenant are:
- Garage parking
- Individual backyards with patios (preferably fenced)
- Engaged Property management
Can you explain the difference between Build-for-Rent and building traditional multifamily housing?
Build-for-Rent communities can be defined as dedicated rental communities of single-family attached and detached homes which generally do not have anyone living above the unit. Building types may include cottages, patio homes, townhomes, and semi-attached. These communities can be permitted as a contiguous multifamily project or with defined lot lines of individual homes. Build-for-Rent communities typically contain 25 units or more. They exclude Single-Family Rental homes (scattered sites) where random non-contiguous homes have been purchased for the purpose of rental investment. The operations of these communities are similar to conventional apartments and incorporates enhanced property management services and often similar common area amenities.
How have pricing and cap rates been impacted?
Pricing and cap rates for single-family rentals and build-for-rent properties have been impacted differently by the current economy.
Regarding single-family rental pricing, institutional investors have decreased capital investments for the SFR sector beginning in Q3 2022. Rising interest rates and concerns about declines in property prices have prompted some recalibration among SFR investors. However, there is still investor demand in the sector with abundant capital on the sidelines. Investors are becoming more selective about acquisitions, and many want to see what the next six to 18 months will bring. In general, cap rates have risen 125 bps over the past year where rising interest rates and declining rent growth have had the largest impact.
The build-for-rent segment of the marketplace is better positioned than the SFR market because operators have better control over costs and execution. Housing starts have lessened due to higher interest rates which has lessened the buyer pool for housing. As compensation, these developers have turned to BFR investors to sell their pipeline and to build BFR communities for them. Cap rates and pricing have been affected to some extent. In some regions, BFR housing was trading at a premium to retail pricing. That has since flipped. Nationally, cap rates, which were in the low to mid-4’s, are now low to mid-5 percent range – trading slightly below conventional apartment yields. The impact of rising interest rates on cap rates could be mitigated, should we be near peak rate for the year.
How can these properties (Single-Family Rental and Build-for-Rent) be financed, both construction and permanent loans?
Construction and permanent financing really comes down to a delineation of Scattered-Site single-family rentals and purpose-built built-for-rent projects. For Scattered-Site SFR, it is financed primarily by major money-center banks, international funds, and life insurance and pension-backed funds. These rates vary depending on longer-term permanent loans, which can be in the mid-5’s, up to shorter-term floating rate options up to high single digit rates.
Purpose-built BFR projects can be financed through most conventional financing sources including Fannie Mae, Freddie Mac, HUD in many circumstances, and traditional life insurance companies. For all of these products, starting with a great, knowledgeable advisor like Berkadia is key. Construction remains a very liquid market today, however higher interest rates have pushed leverage down about 10%, which the preferred equity market has welcomed as an opportunity to enter the SFR/BFR space more aggressively.
In summary, the single-family rental and built-for-rent market appears to be on a growth trajectory, with both steady and booming periods projected. The model is gaining popularity among developers, and the trend shows no signs of slowing down. This is evident by the growing volume of current and future supply and the amount of committed capital from institutional investors.
For continual updates regarding this growing asset class and access to current opportunities, please visit Berkadia Single-Family Rental & Built-for-Rent.