Institutions Flock to Single-Family Rentals As Pandemic Fuels Demand
February 16, 2021
Institutional investors and apartment managers see opportunity in single-family rentals (SFR) as many Americans opt not to pursue home ownership in today’s competitive housing market.
The pandemic has caused an increase in demand for the type of private livable space afforded by single-family homes. This trend has caught the attention of institutional investors, individuals, and apartment managers, many of whom are making sizable bets on single-family rentals (SFR).
In recent times, it is easy to understand the appeal of living a stand-alone home as opposed to a smaller unit in an urban apartment complex. The phenomenon is easily explained by the desire to escape the congestion and restrictions of city centers paired with the newfound flexibility of remote work and more time spent at home.
With a short supply of homes driving prices to historic highs, there is little question as to why Americans are embracing renting instead of buying a modern spacious suburban home.
According to realtor.com, in December 2020, the median listing price for a single-family home was $340,000, a 13.4% increase over the previous year. On a national level, homes for sale in December were down 39.6% from the same time in December 2019, which translates to approximately 449,000 fewer available homes.
Renting a single-family home can be a viable solution for a variety of important reasons. In many markets, home ownership is simply financially out of reach for average wage earners. In other cases, residents are looking for greater flexibility during periods of uncertainty or they simply prefer to avoid the commitment and risks of housing price fluctuations and/or a long-term mortgage.
Investors, builders, and apartment managers have taken note of this trend. Before the recent jump in demand for SFR, institutional owners only comprised 3% of the total inventory, providing ample market share for newcomers.
The uncertainty surrounding other property types, such as office, shopping centers, and multi-family housing, has forced investors to find new vehicles for capital allocation.
Another testament to this trend can be found in the REIT sector. SFR REITs have outperformed the broader REIT market in 2020 by 23%, exceeding traditional multi-housing (-9%), office (-22%), and shopping center (-33%) sectors, reported by JLL Research.
SFR is seen as an opportunity to get ahead of what is believed to be a long-term trend. With the historic low inventory, investors’ next reasonable step is to use the influx of capital to create their own housing supply through a build-for-rent (BFR) model.
New build construction has been at a steady average of around 31,000 units for the past 40 years. We are now seeing an increase to 50,000 units and climbing. The 2008 housing crisis started the SFR trend and now the COVID-19 pandemic is propelling it.
We are also seeing traditionally large apartment operators, such as Greystar Real Estate Partners, adding SFR to their portfolios. Greystar is currently managing 1,500 homes and is targeting growth to 25,000 homes as discussed in this article from Bloomberg.
Running with the idea that others would be willing to lease rather than borrow, apartment managers see an opportunity for a longer sales cycle.
It is always easier to rent or sell to an existing tenant, so it is natural to follow this thought to its logical conclusion in the housing life-cycle. Gary Beasley, CEO of Roofstock, describes it best: the cycle begins with renting out urban apartments to residents in their 20s, moving them to suburban home rentals in their 30s, and eventually selling them a house in their 40s.
By Kris Oxtal MAI, Principal