The institutionalization of the single-family rental market will be driven by key three demographics over the next decade: millennials on the cusp of parenthood, office workers looking for more WFH space, and aging baby boomers, according to a new report from MetLife.
The firm estimates that 11 million new households will be formed in the US over the next decade, and many of those will consist of Americans for whom the price of homeownership is increasingly out of grasp. Saddled by elevated student debt and a lack of savings, nearly 70% of homebuyers in the millennial segment say debt is delaying their purchase. On the other end of the spectrum, baby boomers are navigating Social Security and pension challenges and lower savings rates against the backdrop of ever-increasing medical costs.
“Although it was difficult to foresee the demand increase resulting from the pandemic and work- from-home space needs, the wave of millennials becoming parents and aging Baby Boomers was not,” the MetLife report notes, adding that in the past “we argued investors should begin focusing on larger format housing, including SFR, and that this type of housing could generate the lion’s share of new rental demand during the 2020’s. We continue to believe that to be the case today, but with an added boost of single and non-child households seeking more space.”
The problem is compounded by a lack of new construction and the “obsolescence” of homes built before 1950. MetLife estimates 4.5 million apartment units or single family homes will be demolished over this decade, accounting for significant negative supply growth. And “marrying this with the 11 million household formations implies there will be demand for a minimum of 15.5 million new housing units during the decade in our view,” the report states.
The firm also predicts rent and home price appreciation will be elevated next year, noting that “as supply growth accelerates, we expect home price appreciation, apartment rent growth, and single-family rent growth to moderate. Additionally, we expect supply and demand for traditional apartments to more quickly reach equilibrium given the slightly less favorable, though still positive, demographic conditions for traditional apartments. As a result, apartment rent growth may modestly trail single-family home price and rent growth in the 2020’s.”
So what does this mean for investors? To start, there are options: scattered home strategies, which involve acquiring many existing single family homes at a time, continue to be popular, for example. But purpose-built strategies involving contiguous communities of single family homes that are built to rent are picking up major steam. MetLife notes that while the category is in its early days, the communities may have lower operating expense and capital expenditure ratios and may trade at yields below scattered home investments.
“We believe both classes of single family rentals offer attractive investment opportunities today,” the report notes. “The need for new housing stock provides an opportunity for developers of purpose-built product, while existing scattered home stock, though older, may in some cases offer more ‘infill locations closer to employment centers and transportation links.”
The built-to-rent market has been on fire in the midst of the pandemic, but some middle-market investors have found it difficult to break in. According to Walker & Dunlop, debt in the space has become “a tale of two markets,” as large institutions, family offices, and smaller private equity firms are pouring capital into construction. The same goes for mid-market funds and high net worth individuals. But while institutional sponsors aren’t having any trouble securing debt “middle market investors are facing difficulty due to the lack of banks active in the space,” says Keaton Merrell, managing director, Capital Markets at Walker & Dunlop.
Bridge lending is also emerging as a new product in the space, Merrell says, with the typical bridge at certificate of occupancy financing hovering in the 65-80% loan to cost range.
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