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Category: Apartments, Multifamily Tags: SFR, Single-Family Rentals
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The single-family rental (SFR) market has sufficiently increased in supply, demand, and interest. The arrival of COVID-19 spurred a conversion from working in office to working from home, allowing renters to escape cramped living quarters close to city centers and migrate to suburban developments. Along with this, the millennial generation is growing older and starting families, causing them to look for housing with more room and privacy. Single-family home sales increased in the first half of 2021, with seasonally adjusted sales averaging 32 percent gains and projected development of 921,000 units annually, according to the Joint Center for Housing Studies. Commercial real estate institutional buyers, private equity groups, and developers have noticed and are investing billions of dollars into the sector to take advantage of the accelerated expansion.

 

Single-family development starts increased 29%, and multifamily rose 8% on a 12-month basis from July 2020 to July 2021. (Source: Doge Data & Analytics)

 

What is a Single-Family Rental?

Single-family rentals, otherwise known as purpose-built SFR properties, are build-to-rent communities. These communities are built exclusively for rental purposes and are a driving force behind investor interest. The two main product types of single-family rentals are build-to-rent single-family attached and build-to-rent single-family detached. Attached assets generally provide two or more bedrooms and are, on average, larger than a single multifamily unit but not as spacious as a typical two-plus bedroom home. Detached rentals are primarily found in suburban neighborhoods and platted on individual lots. These homes often include three or more bedrooms and are significantly larger than a multifamily unit. Build-to-rent communities also can include apartment-like amenities, such as a pool, clubhouse, and fitness center, intriguing renters who do not want to give up the perks of multifamily living.

 

Single-Family Rental Development

The single-family rental market growth has reached across the U.S., specifically in middle-sized markets that offer a lower cost of living than major metros. HHC Finance reported that 18.1 percent of single-family construction occurred in the outer suburbs and exurbs of medium-sized cities in Q2 2021. This is a 0.8 percent market share gain compared to Q4 2019. Although single-family construction in core areas of medium-sized metros reported a large 45.8 percent of market share, the share was a 1.2 percent decline during that same period, Q4 2019 to Q2 2021. This influx of demand powered the homebuilding rebound in 2021, but with material costs at an all-time high, momentum is predicted to slow.

 

In Q2 2021, 18.1% of single-family construction occurred in outer suburbs and exurbs of medium-sized cities. (Source: HHC Finance)

 

 

Home shortages and rising costs across the nation forced young Americans to reevaluate homeownership and consider renting for extended periods. But as they grow older and begin to start families, apartment-style living becomes less appealing, and they search for alternative options such as renting a single-family home.

 

The median list price for single-family homes in the U.S. is $357,900, a 22.9% increase from Q2 2020 to Q2 2021. (Source: National Association of Realtors)

 

Some experts say improving rental supply is a viable solution to the ongoing affordable housing crisis facing the nation. In contrast, others say it’s a gateway for excessive rent rates and lowering private investors’ buying power. As renters search for additional square footage, more privacy, and reasonable pricing, the single-family rental market will be a focus for commercial real estate investors.

 

SFR Communities vs. Multifamily Buildings

With the emergence of single-family rental assets, multifamily investors have begun looking at which asset type best suits their investment criteria. The SFR market is witnessing booming demand and has multiple positive aspects, but multifamily products offer opportunities that single-unit homes do not. Working with a specialized expert and strategizing which product fits the investor’s budget, time, and long-term goals is key.

 

Multifamily investments can be extremely profitable, but they are also more challenging and complicated. Working with a specialized agent can help investors identify which asset best fits their criteria.

 

 

Institutional Interest

 

Current housing conditions have caused U.S. rental rates to spike. According to CoreLogic, 85 percent of consumers prefer single-family homes, but with a low for-sale inventory and slowed construction, these homes are far and few between. This has caused limited availability and price increases, pressuring potential buyers to pivot and look to rental opportunities, such as SFR units. The national year-over-year single-family rent percentage has increased for each price tier under the sector. Price tiers are defined by the following: low tier, 75 percent or less than the regional rental rate average, lower-middle tier, 75 to 100 percent of the regional rental rate average, high-middle tier, 100 to 125 percent of the regional average rental pricing, and high tier, 125 percent or more of the regional average rental rates.

 

Rent increases for single-family homes rose from 3% in March 2020 to 4.4% in March 2021. 

 

As the market expands and produces more profit, investors play a major role in the consolidated, institutional ownership of single-family rentals. With a lower percentage of tenant turnover and relatively cheaper startup costs, large buyers
are looking to take advantage of the limited U.S. housing supply and rising rent by buying purpose-built housing developments or existing single-family residences. This could be a risk for private investors as institutional investment drives up property taxes, insurance costs, and government regulations. It’s important to note, although established companies are looking to enter the SFR space, they only make up two percent of the overall buyer pool, according to LoopNet. Private investors make up 85 percent of single-family rental home purchases.

 

Markets Seeing the Most Activity

The single-family rental market is expanding nationwide, but some markets fit the investment criteria better due to population growth and high rent rates. For example, Phoenix has the highest year-over-year increase in single-family rents as of June 2021 at 16.5 percent, according to CoreLogic. Las Vegas has the second highest with a 12.9 percent year-over-year increase. Other top markets are located along the U.S. Sunbelt, which is home to some of the hottest SFR markets because of their rapid population growth, fueling a for-purchase shortage. These markets make prime locations for private equity companies, institutional buyers, and commercial real estate developers to invest in single-family rental communities.

 

What’s Next?

The single-family rental market has set the stage for a large increase in capital, competition, and price in the next few years with its ongoing demand. Changing demographics and consumer habits have shifted the need from a city-center apartment to a private, spacious home in the suburbs. As large institutional buyers continue placing capital in the market, single-family rentals could become increasingly consolidated, causing challenges in the private sector.

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