In this week’s issue, we explore the rise in single-family rental (SFR) interest.
This Week’s Top Headlines
We start off with the week’s multifamily insights and then dig deeper into single-family rentals. Let’s start with the top multifamily stories from this week.
- Gateway Metros: Showed the biggest increase in occupancy and rents according to a new report, based on high household formation and employment numbers — Globe St
- Rents: Due primarily to strong income growth, multifamily rents are also increasing with a new report suggesting a 9.5% increase for 2022 — Bisnow
- Class-A: Renters are witnessing the largest rent increases, which jumped 15.5% in 2021 — Wealth Management
- Construction: Is increasing, led by multifamily starts that will add much-needed supply, and ultimately help stabilize rents in the near-term — Marketplace
- Loans: A major bank is predicting that loan originations for multifamily will remain flat this year due to rising interest rates — TRD
- Land Sales: Are hitting record levels due to high demand from apartment, single-family home, and industrial developers— Wealth Management
- Price Drops: Home sellers are dropping their prices at the fastest pace in 5 months as a result of higher interest rates and record prices — Globe St
Main Takeaway: This could be early days for the single-family rental (SFR) market. Over the next 18 months it is estimated that investors will drop $40 billion into SFRs. Further, the number of SFRs built annually will double by 2024. As millennials enter family building mode and are priced out of the purchase market, multifamily investors should familiarize themselves with and take stock of this growing asset class.
There has been a rise in both institutional and mom-and-pop investor interest in the single-family rental (SFR) space. The share of investor interest continues to increase, with one in five single-family homes currently being purchased by an investor, primarily smaller landlords.
By Q3 2021, investors had purchased a record 90,215 SFRs, up 10.1% quarter-over-quarter and up 80.2% year-over-year. That said, institutional investors together manage only 450,000 of the some 20 million SFRs across the nation. But their share is increasing. Let’s take a closer look at the growing interest in SFRs portfolios.
- Technology: Because of economies of scale, larger investors historically looked to multifamily assets. A portfolio of 100 SFRs versus a 100-unit apartment building would be much more cumbersome and costly to manage. With advent of new technologies and hardware, this gap in operational costs is closing fast.
- Inflation: Rising inflation is also increasing asset values, meaning returns for SFRs is on the rise, and sat at 8% on an average risk-adjusted annual basis last year. Further, single-family rentals provide a more balanced risk in inflationary times that commercial real estate.
- Stickier and Higher Income: According to data, renters aged 25 to 44 make up 48% of single-family renters. These renters earn about $100,000 in average annual income, higher than the $72,000 that Class A apartment renters earn. Renters of SFRs also tend to stick around longer than apartment renters.
- High Everything: The rapid rise in home prices and interest rates mean more and more younger buyers are being priced out of the market. Where are they going? To rentals, but they still want that single-family home experience.
- Rents: In February, rents rose 13.1% year-over-year, and with rising interest rates and inflation, it appears as though these increases will continue, albeit growth levels may slow. But for now, we are seeing historical growth:
“The single-family rental concept is not new, but it has been blossoming over the last several years and most notable since the onset of COVID-19. That is when we really saw things picking up…With affordability continuing to rise and household incomes not rising in lockstep with the cost of a home, this is becoming a more permanent, natural place in solving the housing crisis…I think that single-family rentals will become as prevalent as multifamily housing in the next 10 to 20 years. It really reminds me of when the multifamily sector took off in the 90s.” — Dori Nolan, SVP of national client services at Berkadia.
Chart: Housing Prices
According to the US S&P CoreLogic Case-Shiller Index, housing prices shot up year-over-year by 19.8% in February, the largest increase on record.