Berkadia’s Russ Hardy Brings Us Up to Date on SFR/BFR
The momentum is hardly letting up for single-family rental/build-for-rent (SFR/BFR), the current financing headwinds notwithstanding. That being the case, investors in the space should be mindful of the nuances in this product type compared to conventional multifamily. Connect CRE spoke with Atlanta-based Russ Hardy, managing director with Berkadia, for insights into the current state of the market.
Q: Within Atlanta and the Southeast, are you seeing SFR/BFR taking an increasing share of multifamily sales volume, or is it increasing without diminishing conventional multifamily’s share of the pie?
A: SFR/BFR transaction volume is increasing within the Southeast without diminishing conventional multifamily share. In a sense, SFR/BFR housing is not a 1:1 loss for multifamily; it’s really just an additional housing option, which is needed as we are still undersupplied as a nation.
Additionally, SFR/BFR renters are typically comprised of an older demographic (30s and over) and often times tend to be families or empty nesters. We’ve also seen demand for SFR/BFR housing from contract workers and people moving to a new area who plan to buy a home in the near future but need a rental option in the short-term.
Q: Are you seeing an increasing number of investors who specialize in SFR/BFR rather than doing both apartments and SFR/BFR? What knowledge do SFR/BFR investors need to have that is distinct from the product and market knowledge that conventional multifamily requires?
A: There has been an increase in dedicated SFR/BFR investors, as well as an increase in capital dedicated to this space. We’ve also seen investors who have historically played in the traditional multifamily space, play in the SFR/BFR space as well.
In terms of knowledge of the SFR/BFR landscape, investors should understand a few nuanced differences when compared to traditional multifamily. SFR typically refers to a grouping of single family detached housing or planned neighborhoods that are individually platted on their own tax parcel. SFR has a higher likelihood of being remotely staffed/operated and there are certainly different dynamics at play there from an operational standpoint.
BFR typically refers to single-story, horizontal communities that are on a single plat. BFR is often amenitized and operates more like a traditional multifamily community. In addition, from a market perspective, the “shadow” market of single-family homes for rent often provide better rent comparables for SFR than the surrounding conventional multifamily. Also, the “retail” sales value of “comparable” single-family homes is a consideration currently in the valuation of SFR assets, which is different from conventional multi.
While these differences are not ground-breaking, investors should keep them in mind when planning exit strategies and operations for either type of community.
Q: Is the current credit tightening leading to a slowdown in BFR development, or is the financing still there but with stricter underwriting in place?
A: Current credit tightening is leading to a slowdown in BFR development; however, the financing is still there, with stricter underwriting in place. Smaller developers who use community and local banks have felt a slowdown in construction financing while larger investors who have deeper lending relationships are able to secure financing, albeit at a higher cost.
Q: We’ve heard that apartment rent growth has been slowing. How does SFR/BFR rent growth compare?
A: SFR/BFR rent growth could be described as a decelerating, accelerating environment in many of the high growth Southeast markets. While market, submarket and micro markets are as important as ever, in many markets rent levels have peeled back to historic growth averages. However, some locations are still seeing high growth.
With the Spring season around the corner, we’re starting to see an increase in occupancies and upticks in rents in many markets. Additionally, the SFR/BFR space in general has displayed some level of resilience despite current economic headwinds.