The single-family-rental/build-to-rent (SFR/BTR) sector, a relatively new asset class for commercial real estate investors, still has plenty of runway ahead. Berkadia has been among the most active lenders for SFR/BTR investment in recent years and has scheduled a Beyond Insights webinar titled Navigating Market Dynamics in SFR & BTR for Wednesday, August 28.

Ahead of the webinar is a Q&A with Berkadia Managing Director Joel Kirstein and Senior Director Andrew Curtis, who will moderate a roundtable discussion following presentations by SVP – Berkadia Institutional Solutions Dori Nolan and John Burns, CEO of John Burns Research & Consulting.

Although starts can be volatile from month to month, apartment construction has been generally tapering off over the past few quarters. Are we seeing a similar slowdown in build-to-rent development?

The slowdown in apartment construction is sector agnostic across the CRE industry. Following delays stemming from the Covid-19 pandemic, many markets across the U.S. saw an influx of deliveries at the end of 2023 and many markets struggled to fully absorb the new units.

Similarly, apartment rent growth has been slowing, especially compared to the post-pandemic gains we saw in 2021 and 2022. How does SFR/BTR rent growth compare?

SFR rents are expected to continue to outperform both home prices and apartment rent growth even during this time of economic uncertainty. Institutional investors are becoming increasingly interested in the sector, making up 3% of SFR owners nationally while in many markets they exceed 10%.

SFR asking rents are forecasted to grow by more than 3.5% in 2024, more than 4% in 2025, and more than 5% in 2026. This resilient rent growth is due to a combination of factors including low supply of for-sale and rental properties in the majority of markets, higher mortgage rates and continued elevated home prices, and continued healthy job growth numbers.

Despite an increase in development, especially in the Sunbelt, SFR/BTR is still a considerably smaller sector than multifamily, both in existing supply and new construction. What are some reasons for this gap, and do you anticipate that it could begin to narrow in the coming years?

The SFR/BTR sector is still in the early stages of its adoption, leaving many investors and developers to discover which markets the product operates most effectively in. Large institutional investors traditionally represented three percent of the market, but it’s likely that their market share will double by 2025. It is also expected that institutional capital will represent the majority share of capital invested in the asset class by 2030.

Over the past decade, a pioneering select few represented the majority of the institutional market share in the SFR and BTR asset classes. Now, new investors are entering the market with an abundance of capital given the sector’s favorable returns and rising demand.

With the sector being in its early stages comes operational challenges for investors. Operating these assets is different than operating a multifamily asset and for investors that are coming over to SFR/BTR from multifamily, there is a learning curve. However, it has become clear over the past year that the buy-side of SFR/BTR has gotten increasingly more sophisticated and specific in the types of SFR/BTR product they want and how they operate it. Amenities (e.g., garage count and backyard space) have become more important to investors as well as the operations the product has in place.

What are some demographic trends that favor SFR/BTR demand over multifamily?

The SFR/BTR product is fueled by lifestyle preferences of millennials and baby boomers:

• Millennials, who are reaching major life milestones (e.g., starting young families and homeownership) are being hit by financial hardships such as student loans and a lack of savings, which makes traditional homeownership increasingly difficult. They also tend to be transient in nature and are renters by choice, making the commitment-free SFR/BTR properties an appealing alternative to homeownership. Finally, millennials want the space and privacy of a single-family home (backyards, garage, etc.) without the associated maintenance – another factor driving demand for this sector.

• Baby boomers are tired of the hassle that comes with homeownership and are seeking the ease of renting and the financial flexibility that comes with it. They still desire the privacy of a single-family home and are able to obtain that through SFR/BTR product.

Both SFR and BTR properties offer these generations the maintenance-free conveniences of apartment living all while avoiding the accelerating costs of homeownership, including down payments, mortgages, insurance, and home repairs, all of which are increasingly appealing in this era of high interest rates and less household spending power. As a result, the SFR and BTR asset class has demonstrated outsized returns and favorable fundamentals and has garnered significant investor interest.