National CRE News In Your Inbox.

Sign up for Connect emails to stay informed with CRE stories that are 150 words or less.

Sub Markets

Property Sectors

Topics

National  + Apartments  | 
THOUGH SFR BOOMS, IT’S TIME FOR STRATEGIC AND SELECTIVE INVESTMENT

Though SFR Booms, It’s Time For Strategic and Selective Investment

There’s little doubt that the single-family rental sector is one of the fastest growing when it comes to commercial real estate. How fast?

“It was only 10 years ago that American Homes 4 Rent got started, and Blackstone came in, and it was a distress play,” according to John Burns, chief executive officer with John Burns Real Estate Consulting. He went on to say that American Homes 4 Rent went public in 2013, by 2015, the SFR sector was considered emerging, then just two years later, a mature sector.

“So,” Burns explained, “that you go from distressed play to mature business in six years is amazing.”

Burns was guest speaker at “The Single-Family Rental Boom Continues” webinar, hosted on Feb. 15, 2022 by Berkadia. In addition to providing a brief history of the “modern” single-family rental, the webinar focused on what’s happening now, and whether it’s time to buy, build or wait it out.

The Bulls Speak

At the beginning of the webinar, Berkadia’s EVP and Co-Head of Investment Sales Keith Misner noted that his company is firmly in the corner of active single-family rental/build-for-rent involvement.

Over the past few years, Berkadia sold and financed SFR/BFR transactions, totaling approximately $2.7 billion in the 20 largest SFR/BFR markets across the country; the company’s client investor profiles ranged from public REITs to private capital. Then there are the benefits that Misner pointed out. SFR/BFR properties typically boast higher rents, lower operating expenses and lower turnover rates than do apartments, while they often sell at cap rates similar to traditional apartments.

As such, demand for SFR and BFR is being driven by demand and changing migration patterns, “as well as investors having trouble finding opportunities in other asset types, where pricing makes sense for their targeted returns,” Misner said. “As many of you know, the single-family rental space isn’t a new concept, but the space has become more sophisticated as more investors have entered the space over the past few years.”

There are a couple of reasons for this. First, renter demand. And second, it’s becoming more expensive to own.

1. What Renters Want

Part of the appeal for Berkadia and others is renter demand:

  • 15.7 million rental households live in buildings containing 10 units and more
  • 13.3 million households rent in buildings containing two to nine units
  • 2.9 million renter households are in attached homes
  • 12.3 million rent older homes

Then there is the fact that single-family renters skew younger, between 25 and 44 years old. And many of these renters don’t necessarily like the older homes. “They’re looking for new designs,” Burns said.

“Older homes don’t have the work-from-home offices. Or, if they do, they’re by the front door, where the dog is barking.”

Finally, the BFRs and SFRs owned by institutional players come with professional management. Said Burns: “If you’ve been renting forever with a mom and pop landlord, and not having anyone available when something’s broken, and living in fear they’re going to sell the house out from under you and you’re going to have to move, you don’t have to do that with these guys. They’re not going to sell the house from under you. It’s a better experience.”

2. The Fed, Interest Rates and Home Prices

Anyone who has been in the market to buy a home over the past several years likely understands that prices and costs are on the rise. Burns’ discussion and visuals put a number to this, indicating that nationwide, home prices increased dramatically—by 19%–during 2021.

But even with higher prices, lower mortgage rates could justify home ownership. But that’s likely to change. Burns explained that the Federal Reserve owned 24% of overall consumer mortgage debt which has helped keep those rates low. The Fed also signaled that it’s planning to reduce the amount of mortgage debt in its portfolio. “I’m looking at that more carefully than the Fed Funds (Federal Funds Effective Rate),” Burns said, adding that ownership reduction “should cause mortgage rates to go up.”

Yes, It’s Location

While all the signals point to a continued SFR/BFR boom, Burns cautioned that doing so should be strategic and selective. Certainly, SFR rents have boomed. “But the numbers are all over the map,” Burns added.

According to the Burns Single-Family Rent Index:

  • The year-over-year rent growth change in the top 27 markets was 7% or higher in 2021
  • YoY rent growth during the same time period in the next 27 markets ranged from 4.5% to 6.8%
  • Nationally, on average, SFR YoY rent growth was 4.2%, held back by large supply in the Midwest

Then there are Wichita, KS, San Jose and San Francisco, cities experiencing out-migration, meaning less rental demand. “Rents have actually fallen here, so this is what I mean about being selective,” Burns said. “This is a national opportunity, but it’s playing out differently regionally.”

And It’s Economics

Finally, housing economics underscores strategy and selectivity when it comes to investment in this sector. Burns noted that yields are declining, as costs increase. Furthermore, while “building rental communities has become the hottest residential real estate investment,” he said, “it’s much easier said than done.”

There are the ongoing labor shortages and raw materials price boosts. Land prices are going up, too. “Great locations are not easy to find,” Burns explained. “We’ve got clients that are trying to put a billion dollars to work this year. But you can’t find a billion dollars of good locations, so you’re taking some location risks.”

And while the COVID pandemic-driven move toward remote work is making “the outskirts of yesterday the mainstream of today,” there is such a thing as too far out and too remote. Specifically, “it’s not a good idea to go super exurban (when it comes to location),” Burns advised.

It Depends

Near the end of the webinar, Burns shared his bullish thesis, with the following points:

  • Higher inflation means higher wages, and the ability for SFR owners to push rents
  • Rent-to-income ratios will surpass previous peaks, as people will pay more for a better rental experience
  • Income growth and wages are expected to remain strong

So, build it, buy it or wait it out?

“I’m going to chicken out on the answer,” Burns said. The response depends on an investor’s risk appetite and active versus passive investment. As such, “It’s not a one-size-fits-all investment decision,” Burns concluded.

Watch The Single-Family Rental Boom webinar here.

Connect

Inside The Story

John BurnsKeith Misner

About Connect CRE

  • ◦Financing
New call-to-action
New call-to-action