A new Urban Land Institute (ULI) report has identified an upward trend in demand for purpose-built single-family rentals (SFRs). It’s a trend that has been accelerated by the COVID-19 pandemic, which has prioritized tenants’ requirements for space and increased demand in suburban neighborhoods. Prospective tenants will be working from home more and thus need suitable workspaces separate from the distractions of family life. And more people are choosing to share their homes with pets that require both indoor and outdoor space.
The Requirements for SFR Housing Are Changing
Another contributing factor to the increased demand for SFRs is that millennials are finally starting families. They are looking at rental homes either due to affordability or because they choose not to buy for other reasons. For example, many wish to retain the amenities they have grown accustomed to in their urban apartments, such as gyms, swimming pools, entertainment areas, and even concierge services. Empty nesters looking to downsize are also asking for more than SFRs have historically offered. These requirements are changing the product mix of SFRs.
The current shortage of SFRs and lack of innovation in the SFR market is partly an investor response to the oversupply of single-family homes that arose during the subprime lending crisis. And the subsequent lack of capital provided by the financial markets for conventional single-family homes. But with the median price of houses in America rising faster than salaries, affordability is still a key driver of SFR housing. And job losses from the pandemic have added to it. ULI believes the SFR housing market will benefit from a segmentation strategy to address separately tenants who chose to rent and those who have no other option.
Purpose-Built SFR Housing Is a Relatively New Concept
More than 97 percent of existing SFR housing is owned by small-scale, “mom and pop” investors, many of whom start their portfolios by renting out their own first home when they upgrade. Most own fewer than three properties and don’t ever acquire the economies of scale to realize market efficiencies. They typically market their properties directly to prospective tenants via online platforms, and property management is of a novice level.
The initial institutionalization of SFRs kicked off when organizations took advantage of the fallout of the 2008 financial crisis to buy up single-family homes across the country. Subsequently, aggregators have partnered with builders to buy up bulk homes in newly constructed blocks. Their portfolios consist of uniformly branded and professionally managed properties.
But with the increase in demand for SFR, new players are entering the field, including real estate investment trusts and crowdfunding platforms in addition to traditional investors and developers. They are focused on built-for-rent (BFR) communities that frequently include on-site amenities, tenant support services, and property management. Whereas small-scale and institutional SFR investors mostly own detached homes and occasional attached homes (e.g., duplexes), BFR complexes display more variation in product offerings – detached and attached homes and “horizontal multifamily” homes. This new term refers to various typologies of small non-stacked dwellings generally erected on multifamily-zoned land.
What Do the Numbers Look Like?
Historically, SFR operating margins have been less efficient than multifamily apartments – with net operating income (NOI) around 50 percent. But since 2000, they have steadily improved to become comparable at NOIs of almost 70 percent, which are also equivalent to office space and self-storage real estate categories. SFRs tend to have higher expenses than multifamily complexes, specifically property taxes, insurance, and homeowners’ association levies, although those without comparable common areas can have lower maintenance costs. And their lower tenant turnover rates can help mitigate higher running costs. For BFR, capital requirements are often driven by land values, which are in turn driven by density. Detached products typically compete with single-family-for-sale developers for suburban fringe locations. As a result, capital requirements are in the region of 50 percent more than traditional multifamily requirements.
ULI Policy Recommendations to Watch For
As mentioned earlier, ULI supports the growth of the SFR industry and the burgeoning of new products. With one or two provisos, ULI sees SFR as one possible solution to the affordability crisis in American housing. Accordingly, its report makes specific policy recommendations to facilitate the growth of the industry.
Investors wishing to take advantage of the SFR trend should look out for the adoption of the following by local governments:
– Policies to support growth and diversity in established areas to reduce pressure on greenfield development.
– Policies prioritizing development locations close to existing nodes and facilities that will promote mixing of uses and reduce demand on transport infrastructure.
– Policies permitting neighborhood-serving retail to be included in residential developments.
– Supportive transportation infrastructure for developments that integrate into the existing road or transit infrastructure.