Based on current trends, the single-family rental market will likely be undersupplied over the next 10 years, despite the increased attention the segment is currently receiving. Of course, that could change if the number of units being produced increases dramatically, or if the COVID-19 recession leads to more substantial foreclosures pushing more units into rental inventory, but that is not the trend to date. Currently, approximately 6 percent of new single-family homes are purpose-built for-rent, which would result in around 700,000 new units over the next 10 years. Given demographic trends, the demand is expected to be much greater than the current pace of production, which could result in a significant supply shortfall, suggesting the sector presents a strong investment opportunity in the coming decade.
Since recovery from the global financial crisis, the single-family rental market has evolved from individual units owned and rented out by small investors, to large investors acquiring significant portfolios of scattered units, to building new units specifically for rent, creating entire communities of single-family rentals with professional management. Build-to-rent homes are not a single product, for while they include suburban style single-family homes, they also include single-story detached apartment-style units, or horizontal apartments, small lot single-family homes, and even duplexes and row homes.
Following the global financial crisis, the share of single-family rental homes expanded substantially as a result of excesses in the for-sale market, and several million additional households became single-family renters, moving into the large vacant stock of newly foreclosed single-family homes. Many of those vacant units were purchased by private-equity groups and other investors, helping to stabilize the housing market. Institutional investors had entered a market previously dominated by small mom-and-pop investors and found it to be an attractive and growing market. Once the supply of excess housing inventory had largely been absorbed, industry participants began looking at other options, including continuing to buy resale homes, and more recently focusing on building new units for rent. According to the 2018 American Community Survey, there were 12 million detached one-unit rentals in the United States, representing 27 percent of total occupied rental housing.
While large institutional investors still own only a small percentage of the single-family rental market, the number of institutional investors considering or actively moving into the space is growing. Among the players in the space are American Homes 4 Rent, Blackstone, Front Yard Residential, Invitation Homes, Progress Residential, Tricon Residential (formerly Tricon Capital Group), among others.
The demand for new build-to-rent product is being driven by demographic shifts resulting in more households being in the stage of life where single-family housing better suits their needs, and the housing affordability challenges that are keeping many households, especially first-timers, out of the for-sale market. Although some are forecasting home price declines as a result of the COVID-19 recession, the ratio of household incomes to median home prices over the past two years has been at record highs, continuing the decreasing affordability trend that only paused during the recovery. Given strong household growth and a lower than historical ratio of housing production to that growth, recessionary impacts to home prices are likely to be short-lived and a lasting return to general housing “affordability” is unlikely any time soon.
It’s important to note that many households make a conscious decision to rent not simply because it is more affordable, but also because it provides them with more flexibility, foregoing having to tie up their savings in a property, as well as allowing them to rent in a more convenient location rather than purchasing an attainably priced product at the suburban or exurban fringe.
While many would-be homebuyers lack the resources to purchase, they are attracted to the lower density and private outdoor spaces that single-family rentals offer, but without the down payment and commitment of ownership.
Within the detached build-to-rent home space, the two ends of the spectrum are the traditional single-family homes for rent in platted subdivisions, developed at less than 10 units per acre, and the single story “horizontal apartment” complexes, typically comprised of 90 to 200 units or more and developed at over 10 units per acre on a single legal lot.
The opportunity to move into the single-family horizontal apartment space is attractive to multifamily developers. Early projects located both adjacent to and within master-planned communities are intended to provide renters with the ease of apartment living along with the privacy and lifestyle of single-family homes.
The horizontal apartment complexes typically target millennial households and also capture some empty nesters, but don’t tend to attract as many families with children as the more traditional single-family rental homes.
Relative to typical multifamily apartment renters, single-family renters overall tend to be older and are more likely to include households with children.
Much of the focus of multifamily development over the past five years has been in high demand urban locations, attracting young professional singles and couples who appreciate the proximity to employment and urban amenities and entertainment such as restaurants and bars. Meanwhile single-family rentals, and build-to-rent product in general, are more focused on suburban locations where the larger sites required are available and priced at a level that is supportive of the lower density. Although millennials comprise a larger share of households in urban places, the majority of millennials live in the suburbs. The majority of jobs, and job growth, is concentrated in the suburbs, and many millennials are reaching the age at which single-family living has historically been more preferred.
There is speculation the current COVID-19 health crisis will drive more millennials to the suburbs due to anxiety about living in higher density places or relying on public transit. What’s more, many are accustomed to telecommuting, affording them the opportunity to rent in a lower cost area than close-in to the city. That said, suburban activity centers are expected to make a comeback among millennials as the health crisis recedes, given that generation’s demonstrated preferences for locations with a sense of place and urban amenities. Proximity to these places and single-family rentals will be important to them in lieu of legacy urban downtowns. Suburban locations will continue to be successful, with the best of them close to employment, shopping and entertainment.
Given the anticipated undersupply of single-family rentals for the foreseeable future, this segment represents a strong opportunity for investors, builders and developers to create new rental home communities in a variety of formats to serve a growing market.
Gregg Logan and Todd LaRue are managing directors at RCLCO. Read their full report at this link: https://bit.ly/35Vp1WF