Berkadia’s Jeff Coles on Single-Family Rental’s Continuing Surge
To an investor focused squarely on multifamily, 2021 might appear to have been the year that the industry discovered the single-family rental and build-for-rent segments. In fact, Berkadia has been involved in financing SFR for the past decade. Ahead of Berkadia’s upcoming Feb. 15 webinar, “The Single-Family Rental Boom Continues,” Connect CRE sounded out Jeff Coles, VP of client services for the current read on the sector.
Q: 2021 saw U.S. apartment rents grow by an average of 13.5% year-over-year. Yet single-family rentals saw slightly faster annual growth of 13.8%. What’s behind this surge?
A: Single-family rentals account for roughly 15.2 million or 37% of all rental housing in the United States. The combination of the national housing shortage and increasing single-family home prices have propelled the perfect environment for growth in both rental apartments and single-family rentals over the past 18 months. SFR/BFR, like multifamily, is underpinned by strong fundamentals, demand characteristics and resiliency.
Q: Is it accurate to say that within the SFR universe, build-to-rent is geared more toward the “renter by choice” demographic than “renter by necessity”? How does this influence location as well as finishes/amenities?
A: The SFR renter is deemed to be more of a lifestyle renter exhibiting higher household income levels and creditworthiness. SFR/BFR is becoming increasingly popular by different renter cohorts too as they look for more flexibility which they can obtain by renting but also have the conveniences offered with a single-family living – space, privacy, backyards, direct access garages, etc.
Q: From a development and operational standpoint, what are some of the advantages of the BTR model compared to scattered-site SFR? What are some of the challenges?
A: BFR properties normally boast higher rents, other income packages, lower operating expenses, lower turnover rates, high availability of professional management (just like for traditional apartments) which tend to produce higher values and frankly more efficiencies. Moreover, BFR assets often sell at similar cap rates as traditional apartments. With these factors in-place, institutional investors are now flocking to the BFR space.
The challenges to building BFR communities are similar to ones when building for-sale homes. Large tracts of land must be acquired, entitlements need to be cleared, and approvals given – all at the risk of market timing.
Q: The SFR renter pool is potentially much larger than it appears. What are some opportunities for larger-scale operators to capture incremental market share of what remains a highly fragmented sector?
A: Yes, the SFR renter pool is very large. As I mentioned earlier, roughly 37% of all renters today live in SFR properties. Real estate is highly fragmented which creates tremendous opportunity for skilled owners/operators to capture incremental market share. SFR properties attract many types of renter cohorts which makes it even more unique than traditional apartment rentals. Operators with robust marketing and operating plans should realize stronger performance.
Q: Where has Berkadia seen the most activity in the SFR space? Which investors are most active in this product type?
A: Berkadia was an early mover in the SFR space—we began selling and financing SFR communities in 2012. And, most recently, our involvement has accelerated over the last 18 months due to demographic shifts boosted by the pandemic.
Berkadia is seeing the largest booms in the Sunbelt and Southeast markets, along with national suburban areas that allow for the lower densities of SFR properties. In some markets such as Arizona, SFR normally doesn’t compete with traditional apartments or vice versa, but rather expands the overall market for tenants.
However, in some markets experiencing supply imbalances, SFR can be seen as a direct competition to traditional apartments as traditional units seek to rebound from COVID-19 losses in the short term. In contrast, certain gateway markets have minimal available land, so this asset type is virtually non-existent in markets like New York, Seattle, and San Francisco.
In terms of investors, SFR appeals to a diverse pool of investors and we’re seeing new investors entering the space every day.
Q: Last year saw the SFR market move from a niche investment to one of the fastest growing products in CRE. Where do you see the SFR market in 2022?
A: That’s correct, SFR has transitioned to one of the fastest growing sectors in CRE. In 2021 alone, $30 billion of debt and equity entered the space with billions more targeted in future commitments. Based on the insatiable appetite, we don’t see investment or development slowing down anytime soon.
Prominent home builders are making the SFR/BFR a major component of their business models while large, sophisticated institutional investment firms are allocating more capital to SFR properties strategies.
Potential headwinds could include rising land prices amid relatively low inventory of available land, which could hinder investor returns. However, again, we don’t see any immediate signs that will slow down investment anytime soon.
Berkadia Co-Head of Investment Sales Keith Misner and CEO John Burns of John Burns Real Estate Consulting will lead the SFR conversation during Berkadia’s upcoming webinar. Click here to register.