The single-family rental (SFR) market is one of the hottest sectors in commercial real estate—and for good reason. Strong demand and constrained supply are creating a healthy runway for growth in rents and property values. The market is further boosted by industry consolidation and technological advances.
In the coming years, the SFR market is positioned to deliver compelling risk-adjusted returns and outperform many other commercial real estate investments. Driving this positive outlook is the confluence of four fundamental themes:
1. Supply is constrained.
|
3.8 million units +52% |
Tight supply has been a decades-long challenge for the US housing market. According to research by Freddie Mac, the main driver of the housing shortfall has been the long-term decline in the construction of single-family homes, exacerbated by an even larger decline in the supply of entry-level “starter” homes. Other reasons for the housing shortage include lack of available construction labor, land use regulations, zoning restrictions, NIMBYism, and lack of land developers. Rising raw material costs—especially during the pandemic—have also been problematic.[1]
Although construction of new single-family homes is increasing, the pace remains below historic levels.
When considering supply specific to the SFR market, it’s important to recognize that a given property could come in and out of the SFR supply tally depending on whether the owners choose to live in the home or rent it out to tenants. Data from the US Census Bureau tracking these trends illustrates the shortage of single-family homes available to rent: Over the last five years, the amount of owner-occupied housing increased more than 10% while the amount of rental housing increased just over 1%.[2]
2. Demographics trends are driving strong demand.
|
In the next five years (2022-2026) +7.5 million total housing units 10% above average growth in last 10 years +807,000 Source: Green Street, “U.S. Single-Family Rental Outlook,” January 202 |
Aggregate demand in the SFR market is driven by two critical dynamics: Preference for single-family homes, and the propensity to rent instead of buy.
The preference to live in a single-family dwelling—as opposed to an apartment or other type of multi-unit housing—often comes down to age, marital status and the desire for more space. People aged 35-44 are typically in the phase of life that involves marriage, forming families and having children, which often coincides with a tendency to prefer the space offered by single-family homes.
As a growing wave of millennials—the largest living adult generation in the US—enters the 35-44 age range, demand for single-family homes is expected to surge. Greater adoption of work-from-home arrangements is also poised to lift demand for single-family homes as people seek more space.
For people who want to live in a single-family home, the choice between renting and buying largely depends on affordability. In terms of affordability, a strong labor market is driving solid job and wage growth; however, home prices are rising faster than incomes, leaving many households unable to afford the purchase of a single-family home. Consider this: Wages have grown 40% since 2012 but entry-level home prices have increased more than 100%.[3] Further complicating the affordability picture are rising mortgage rates, larger down-payment burdens and the unwinding of pandemic-era relief programs, such as student loan payment freezes.
Lifestyle-related reasons also underpin the choice to rent, including the desire to avoid maintenance and maintain the flexibility to move. Single-family renters also say they don’t want the financial responsibilities of homeownership.[4] These reasons often resonate with baby boomers and retirees—another important source of demand in the SFR market.
|
Supply-demand dynamics provide supportive backdrop for SFR investment returns The combination of strong demand and significant supply constraints sets the stage for attractive investment returns supported by price appreciation and rental rate increases. Over a one to two-year horizon, experts are forecasting rental rates to grow at pace well above inflation, while occupancy rates are expected to stay at high levels. |
3. Technology is creating new efficiencies.
Managing a portfolio of rental homes scattered across various sites is challenging—but new technologies are delivering efficiency gains to the SFR sector, which are being translated to investors in the form of an increasingly attractive return profile.
Asset owners are harnessing innovative technology to drive operating improvements. Technology is making a measurable difference in many practical applications, including repair and maintenance, acquisition and asset management processes, resident underwriting and leasing activities. Technology is also empowering property owners to continuously upgrade the resident experience by delivering more convenience and flexibility. Potential residents, for example, can use online platforms to schedule showings, submit applications and even break up security deposits into affordable monthly payments.
4. Ownership is shifting from mom-and-pop teams to institutional firms.
The vast majority of single-family rental properties are owned by investors who have ten or fewer rental homes, creating a very fragmented industry. In recent years, institutional firms have become more involved in the SFR market. Today, institutions own approximately 2-3% of single-family rental units. By comparison, institutions own an estimated 55% of multifamily rental units.[5]
US housing market
|
Institutions own ~3% of total single-family rental units |
Source: Green Street, “U.S. Single-Family Rental Outlook”, January 2022
Growing institutional ownership in the SFR market indicates the sector is moving out of its nascent stages and into the early phases of maturation. As operators gain experience, establish best practices and move to consolidate a highly fragmented market, several positive forces come into play, including the benefits of scale as well as advantageous revenue, cash flow and cost dynamics. Collectively, these developments are poised to enhance returns for individual investors.
|
The SFR market appears poised to deliver long-term portfolio benefits to individual investors. Favorable fundamentals, including a persistent supply-demand imbalance alongside technological advances and industry consolidation trends, are creating a healthy runway for attractive returns. |
Capturing the SFR opportunity: Why does an aggregated approach stack up well?
Individual investors looking to participate in the SFR market have multiple options. An active approach involves acquiring one or more single-family homes—a hands-on choice that doubles down on the granular, operationally intense nature of the SFR market. A passive approach involves buying shares of a pooled investment vehicle, such as a REIT—a choice that stacks up well for two key reasons:
Aggregated investment vehicles can deliver diversification benefits.
Investing in a pooled vehicle focused on the SFR market can offer greater diversification potential than directly owning a handful of properties. Most aggregated investment strategies own hundreds, if not thousands of SFR homes, often spread across multiple geographic markets and states. Some funds also offer the ability to diversify across different types of SFR properties, such as established “scattered site” homes as well as communities of new homes purpose-built to be rented, known as build-for-rent (BFR). Because diversification reduces volatility and helps mitigate losses from any one investment, pooled vehicles are better positioned to handle the inevitable swings within the SFR market than concentrated bets on directly owned properties.
The concept of diversification is also relevant within the context of an investor’s overall portfolio. Many investors look to real estate to boost diversification in a portfolio of stocks, bonds and cash. When considering how an SFR-focused investment may impact portfolio diversification, it’s important to recognize the differences between public and private investments. Because publicly-traded investments are, by definition, listed on the public market, they tend to exhibit higher correlations with stocks, making them more responsive to short-term volatility in the broader equity market than private investments. As such, private investments may deliver greater diversification benefits to a portfolio.
Pooled strategies offer access to skilled, scaled operators.
Scale and expertise are critically important ingredients to success in the SFR market. As passive investors, pooled vehicle shareholders can benefit from the experience and knowledge of a team of professionals whose core competency is the SFR sector. Furthermore, aggregated strategies offer individual investors access to economies of scale which are largely unattainable with direct ownership. Aggregation creates advantages at every step of the SFR process, from sourcing target properties and securing favorable financing terms to completing cost-efficient renovations and managing ongoing maintenance. When experts are at the helm of scaled SFR portfolios, individual investors stand to benefit.
The Peak Housing REIT: A single-family rental housing investment portfolio delivering stable dividend income and share price appreciation.
8% targeted preferred return, distributed quarterly
Projected 15%, 5-year IRR
Contact us at investors@thepeak.group or visit https://www.thepeak.group/reit to learn more
Brought to you by The Peak Group, a vertically integrated housing company managing more than $250 million in assets and 2,000 homes.
[1] Freddie Mac, “Housing Supply: A Growing Deficit,” May 2021, https://www.freddiemac.com/research/insight/20210507-housing-supply
[2] US Census Bureau, as cited by The National Rental Home Council, “NRHC Statement on Senate Banking Committee Hearings,” February 2022, https://www.rentalhomecouncil.org/wp-content/uploads/2022/02/SBC-hearing-Feb-10.pdf
[3] Tobias J. Peter, American Enterprise Institute, “How the Federal Government’s policies are crowding lower income Americans out of the housing market,” Statement before the Senate Committee on Banking, Housing, and Urban Affairs, February 2022, https://www.aei.org/research-products/testimony/how-the-federal-governments-policies-are-crowding-out-lower-income-americans-out-of-the-housing-market/
[4] New Home Trends Institute by John Burns Real Estate Consulting, LLC, survey data 1Q21, published June 2021
[5] National Rental Home Council, “Snapshot of SFR Market,” https://www.rentalhomecouncil.org/resources-research/
