Investor interest in single-family rental housing has been increasing for the past several years, but the category’s strong performance amid the COVID-19 pandemic has cemented SFRs as an asset class that is here to stay.
One of the property type’s close observers is Michael Carey of Altus Group, an organization that recently completed a detailed research report on SFRs.
How many single-family rentals are in the United States, and what is the category’s growth rate and customer demographics?
About 15 million units, mostly owned by individual investors. About 45 percent belong to landlords who own just one unit (mom and pop’s) and 87 percent own 10 or fewer units. SFRs are a relatively new asset class for institutional investors. Despite rapid growth, institutional ownership and portfolios with more than 2,000 properties, is only 2.5 percent or 375,000 homes. Institutional investors purchased over 46,000 units per year in 2018 and 2019. We estimate they purchased 55,000 to 65,000 homes in 2020, which reflects their increased interest. We expect over 70,000 for-rent homes will be purchased or built in both 2021 and 2022.
Demographically, SFRs are more conducive to larger households who want extra space, privacy and neighborhoods with good schools. About 50 percent of SFRs are occupied by families with minor children and 60 percent of the homes contain three or more bedrooms, compared with 8 percent in multifamily residences. When compared with the typical multifamily renter, the SFR renter is more likely to be married, have children, have a higher income, and is older.
What kind of rent growth is being experienced?
The national year-over-year rent growth was about 3.6 percent. Leading markets include Atlanta, Charlotte, Jacksonville, Los Angeles and Phoenix. Underperforming markets include Chicago, Houston and Orlando. We compare this to a report by Moody’s Analytics that effective rent growth for multifamily properties decreased by 1.2 percent year-over-year.
Maintenance costs have long been a concern, especially considering these properties tend to be spread across a market(s). How burdensome has that proven to be?
SFR operators are focused on improving efficiencies. They do this by investing in technology and data analytics. Several have developed proprietary software for all facets of ownership including acquisition, renovation, leasing, management, and repairs and maintenance. Owners need to attain a certain level of critical mass in a market to operate efficiently. Although some owners target 750 properties, the largest operators target 2,000. This allows them to localize operations and achieve efficiencies comparable to multifamily properties. Scaling to a critical mass has resulted in increased NOI margins. Ten years ago, the NOI margin for a portfolio of properties in the same MSA was 55 percent. Today, it is 62 percent to 65 percent and some newer properties are approaching 70 percent. This is near the margin for multifamily properties.
Where are SFR investor dollars coming from and what is the greatest risk to the SFR market?
Interest in the category is coming from all corners — private operators, large private equity firms, investment managers, plan sponsors, insurance companies, family offices and sovereign wealth.
As for risk, there is a general housing supply shortage and a tremendous amount of capital entering the market. Plus, there is no true distressed supply available. Combined, these factors can lead to higher prices and lower yields if rents do not keep up with price increases.
What trends should we watch for in 2021?
The increased interest in “secondary” markets and the expansion of the build-to-rent product type. Primary markets are getting expensive and the massive inflow of capital will force larger investors to secondary markets because of lower price points. Although there is more risk in secondary markets, investors will be compensated by higher returns. Also, less competition and more supply will allow them to scale to a critical mass and give them portfolio diversification.
We believe build-to-rent will be the fastest-growing residential market segment in 2021. Real institutional money is already in the market and more is coming. Build-to-rent properties are attractive because they have increased efficiencies through higher tenant retention and lower turnover and maintenance costs, including warranties for new appliances and operating systems. Plus, they produce a return higher than multifamily construction.
Investors need a scalable portfolio, and the larger ones are partnering with local builders in purpose-built communities as opposed to buying out the last 20 or 30 lots in a new subdivision.