Single-Family Rentals Come of Age

Single-family homes have historically been owned by one of two groups—homeowners who lived in the houses and “mom-and-pop” investors who rented them out. For the latter group, single-family homes provided a relatively uncomplicated entry into real estate investing. These properties are typically more affordable than other multifamily assets, such as mid- or high-rise buildings, and while the tenant pays the mortgage, the “mom and pop” build equity.

But when home values collapsed under loads of debt during the Great Recession, institutional investors like Colony Capital, Starwood Capital and Blackstone began buying up suburban single-family homes at significantly discounted rates in order to rent them out. A growing number of institutional investors quickly followed suit, citing favorable long-term secular trends that were beginning to play out.

These trends included the maturation of millennials, which would lead to marriage, child rearing and a desire for good neighborhoods, good schools, more living space and a yard. At the same time, many of these same millennials were locked out of homeownership by heavy student debt burdens, which made it difficult to save for a down payment, and by the imposition of strict mortgage underwriting standards following the Great Recession. From 2006 to 2018, the number of single-family rentals in the U.S. grew 30.1 percent to nearly 14.7 million, according to the Urban Institute. Institutional ownership in the sector has risen rapidly as well, and new players continue to enter the market.

Though institutional ownership has grown significantly in recent years, it still makes up a small percentage of the single-family rental market, leaving a long runway for continued growth. Of some 23 million single-family rentals in the U.S. today, 1.16 percent are owned by large operators, according to the National Rental Home Council (NRHC).

Solid fundamentals

The resiliency of single-family rentals during the pandemic has helped solidify confidence in the asset class. Along with the previously noted secular trends, a transition to “work-from-home,” health concerns stemming from dense urban living arrangements and lockdowns that restricted movement have helped bolster single-family rental demand and fundamentals.

The Single-Family Rental Market Index, a quarterly survey that gauges the industry’s health by measuring factors such as median rent, leasing activity and occupancy, rose to 90.3 out of 100 in the first quarter of 2021 from 62.5 out of 100 a year earlier, according to John Burns Real Estate Consulting and NRHC, which created the index in mid-2019. Similarly, same-property portfolio occupancy, which refers to properties that had completed renovations or became stabilized prior to the start of the quarter and does not include properties that were slated for sale, climbed to a record high index of 80.1 in the first quarter from 60.3 a year earlier. Single-family rental operators also reported a tsunami of leasing activity and expected it to remain brisk through the next six months.

The strong demand is fueling robust rent growth. Single-family rental rates increased 5.3 percent in April 2021 compared to a year earlier, according to CoreLogic. A shortage of housing (the U.S. is 5.5 million homes short of where it should be) and a consequent rise in home prices suggest that the single-family rental industry will enjoy healthy demand and rent growth for the foreseeable future.

The rise of build-to-rent

Given the overall housing shortage, the single-family rental industry is increasingly building communities of single-family rentals to meet the demand rather than solely depending on the acquisition and conversion of existing homes. This so-called “build-to-rent” segment of the single-family rental asset class is not new. Not long after institutional investors began buying homes to rent, homebuilders like Lennar began building single-family rental communities and other single-family rental operators contracted with builders to buy their newly constructed homes.

The approach brought some 25,000 single-family rentals to the market in 2014, and since then, more and more homebuilders and investors have embraced the concept. In 2020, builders added 226,000 single-family rentals to the market, up from 219,000 in 2019, according to the U.S. Census Bureau.

For renters, the properties provide all the benefits of a new upscale apartment—professional management and maintenance, and amenities like pools and gyms—but in a standalone setting that offers more space and privacy. Anecdotally, it seems that a large number of residents in build-to-rent communities are millennials and empty nesters. While both of these groups continue to display a preference for mobility and freedom from a mortgage, millennials in particular see the new suburban homes as ideal settings to start a family.

For quite some time, real estate observers have debated as to whether the single-family rental boom was a fad or a permanent fixture of the U.S. housing market. With the emergence of the build-to-rent segment of the single-family rental market, it is clear that single-family rentals are here to stay. It’s hard to ignore how the industry’s growing investment appeal mirrors the rise of multifamily itself as a favored institutional asset class over the last few decades. From March 2020 to June 2021 alone, institutional funds poured roughly $15 billion into build-to-rent companies, as well as conventional single-family rental operators, according to John Burns Real Estate Consulting, which only tabulated the 25 largest deals.

In fact, the single-family rental industry is estimated to be a $3.4 trillion market, which is just shy of the multifamily industry’s $3.5 trillion market value, according to Walker & Dunlop. The commercial real estate finance company also predicts that the growth of the single-family rental space will outpace that of apartment, office, retail, storage and hospitality properties over the next few years, because population growth will continue to put pressure on housing needs, especially as the millennial generation creates more families.

Capitalizing on the opportunity

While mom-and-pop investors still dominate the single-family rental space, that landscape is gradually changing. For investors who want access to the high-growth asset class without the hassle of midnight phone calls to plunge a toilet, crowdfunding can provide access to invest in single-family rentals and build-to-rent communities. Investors will still receive the benefits that come with it, including escalating rent payments and appreciation to name a few. And like other real estate asset classes, single-family rentals have a relatively low correlation to the stock market, which can help diversify investment portfolios. As hard assets, single-family rentals could also provide a hedge against inflation.

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