Over the past year, the multifamily market has experienced significant growth in its low-density product offerings. The largest demographic cohorts (Boomers and Millennials) have created a fundamental shift in housing demand. Even though rents are still on the rise nationally (albeit at a declining rate), more people are choosing to rent single-family homes and built-for-rent styled homes instead of conventional apartments. This may take some investors by surprise, but the solid fundamentals of this segment of housing provides justification. The below will help you understand the growing demand for single-family rental/build-for-rent rentals and how it compares to conventional multifamily apartments.
Let’s define the players.
Single-family rental (SFR) units are defined as single-family homes that have been developed or converted into rental properties. The properties are usually non-contiguous in nature. The conversion is done by a developer, investor, or an existing homeowner to capitalize on a higher return otherwise received by a sale of the property. An SFR property may be the result of market demand or over supply in the for-sale market. Owners of single-family rental can be referred to as “scattered home” or “scattered site” investors.
Built-for-rent (BFR) properties are contiguous communities specifically developed and managed to operate like apartments which can come in the form of detached, townhomes/plexes, or horizontal apartments. BFR communities provide renters the size, conveniences and feel of single-family living, while offering the benefits of professional management and community amenities.
The current landscape.
The SFR/BFR market is young, with approximately ten years of development under its belt. This unprecedented demand continues to influence the design, construction, property management and investment into this type of housing. Rising rents, lower operating costs and newer technologies, which provide management efficiencies, has led to increased investor appeal.
Institutional investors are increasingly entering this space. Due to the complexities of financing and managing the assets, there was little institutional presence 10 years ago. and that number is rising. Institutional investors are also discovering that built-for-rent housing is complimentary to conventional multifamily while providing diversification in product type.
Single-Family Rentals and Build-for-Rent properties are viable options compared to the conventional apartment sector.
As the rental housing sector continues to grow, we’re seeing a rise in the number of units being rented as SFR. Economic uncertainty and dramatic increase in the monthly cost to own have influenced people to rent versus buy. This has resulted in a weakened demand for new and existing home resales.
Home price escalation over the past few years has also hurt sales. The number of single-family sales has slowed in most markets with the national average being -51% YOY. Cancellations rose YOY in all regions of the US with the largest peaks in the Southwest and Texas market (42% and 39%, respectively)1 – some of the strongest markets for single-family rentals. Job layoffs are on the rise and the US national housing cost-to-income ratio is up to 41%.
What does this mean?
In a nutshell, many families who want to own a home and cannot afford to buy will rent instead. Homebuilders are recognizing the value in the shift to renting and have begun selling excess supply to single-family rental investors and aggregators. While per unit pricing may not always reach that of a conventional retail sale, selling in bulk to SFR investors limits the downside for homebuilders. Also, single-family rental investors further their opportunity to participate in the phenomenal rental metrics this market produces – a win-win for all. Many homebuilders who have not yet decided to sell in bulk now have a “buy or rent” option, recognizing the demand for this type of rental.
Regarding build-for-rent, many investors consider this asset type the darling of the investor class. Its rental fundamentals are very appealing.
There are also intangible metrics which substantiate the allure of BFR housing. BFR tenants are typically more responsible. They take ownership in their home more than traditional apartment units leading to lower maintenance costs. Increased privacy, back yards, garages and storage make tenancy “stickier,” thus lower turnover. Also, build-for-rent households tend to have higher average incomes leading to lower rental-to-income wallet share –all resulting in a heightened demand from private and institutional capital typically focused on conventional apartments.
The SFR/BFR Market has Potential to Grow
Investing and building SFR/BFR communities is a great hedge against inflation. A sizeable 67% of the SFR/BFR households are within the 25-54 age cohort. Even though SFR/BFR households typically earn higher incomes, they are renters by choice and are less likely to transition into home ownership. This is further substantiated by current inflationary pressures, the shortage of housing in our country, and the need for larger homes as hybrid work from home policies solidify and their average family size increases. All predictors point to SFR/BFRs as being more resistant to the economic headwinds than most other forms of real estate.
This past year has demonstrated that the SFR/BFR market is continuing to develop and is garnering substantial interest. It will be interesting to see how this segment will continue to develop and eventually be seen as complementary to conventional apartments. The flexibility and appeal offered by this option makes them appealing for many renters who want to live in more unique homes that suit their needs. The appeal of higher rent growth, strong occupancy, reduced maintenance costs, lower turnover and a superior resident demographic profile is appealing to capital looking to diversify in the multifamily market. As today’s housing unaffordability crisis and housing shortage continues, it seems that single-family home rentals are becoming a new normal with plenty of room to grow. Learn more about our Single-Family Rental and Built-for-Rent opportunities.
- John Burns Real Estate Consulting 12/22 Monthly Update