SFR Emerges from Pandemic
Will Other Factors Impact the Industry in 2022?
By Tim Reilly
This time last year, I compared the Single-Family Rental (SFR) market to the great Gold Rush of 1849. Supply constriction, low interest rates, rising home and rental prices and strong returns created a highly attractive environment for a growing population of professional investors searching for the same hidden treasure. The “Goldilocks” market conditions triggered in part by the COVID-19 pandemic have turned SFRs into a highly valued and resilient asset class that has proven, once again, it is here to stay.
The SFR industry has continued to outperform expectations with unprecedented activity stemming from record number securitizations, new market entrants, and expanding warehouse banking lines. SFR Real Estate Investment Trusts (REITs) have been one of the top-performing real estate sectors throughout the pandemic.
But how will continuing lack of supply, increasing rates, and other evolving market dynamics in 2022 impact the industry? And what does the future of the single-family rental look like? Before we get to these questions, let’s start with a high-level overview of the asset class and a deeper dive into its performance in 2021.
The SFR Market Grows Up
In the wake of the Great Recession, the housing environment was nearly the opposite of how it looks today. Excess supply and nonexistent demand which followed the mortgage market collapse led to plummeting home prices. Some daring and intrepid investors stepped into the breach to purchase foreclosed properties with the intention of rehabbing and renting them before reselling the homes when the market recovered. The unintended consequence caused by these investors’ actions resulted in the stabilization of home prices in an otherwise rapidly depreciating housing market. They were buyers when everyone else had soured on the national housing market.
As home prices began to rebound, many of these investors continued to lease the properties to consumers who were looking for long term, stable suburban rental opportunities managed by professional property owners. The new owners found that the cash flow, historically low interest rates, and steady price appreciation were a profitable recipe.
The business model’s early success attracted the attention of more capital markets participants and more large institutional investors who could aggregate large numbers of rental properties. The win-win recipe for consumers, owners and capital market participants ignited the new single-family rental asset class.
At the onset of the COVID-19 pandemic, there was widespread concern that the SFR market would suffer as unemployment could lead to rental delinquencies. Yet, in reality, the SFR market experienced an unprecedented boom. The pandemic created a heightened demand for more square footage, less urban density, and privacy for the new “work-from-home” environment.
The new combination of factors drove more renters to less dense, more spacious single-family homes outside of cities. And as commercial real estate and hospitality investments looked uncertain, institutional investors looked to more stable investments in residential real estate. The Wall Street Journal reported there was more than $150 billion of private-equity real estate cash looking for a stable investment haven in 2020—and many fund managers turned to SFRs.
Even record-low housing supply challenges that escalated throughout the pandemic did not slow the momentum in the SFR market. The SFR industry continued to creatively adapt to the low housing supply by offering new Build-to-Rent (BTR) communities. In fact, BTR housing became the fastest growing sector of the housing market, with more than 44,000 rental homes built in 2020 and 51,000 built in 2021, according to the National Association of Home Builders.
According to the Single-Family Rental Survey conducted by JBREC/NRHC, 26% of portfolio growth for SFR operators came from BTR homes, rising from 11% in 2020 and up sharply from just 3% in 2019. Professionally managed BTR communities with amenities like pools, fitness centers, playgrounds and walking trails provide a lifestyle that appeals to a wide variety of renters from Baby Boomers to Gen-Z.
Without a doubt, 2021 was the best year ever for SFR capital markets and its participants. A record number 29 SFR securitizations closed in 2021, far outpacing the 14 securitizations closed in 2020. Smart money was on the SFR industry as the JBREC/NRHC Single-Family Rental Survey reported that single-family rents rose 9% year-over year in the fourth quarter 2021.
Single-family homes built to rent are delivering strong returns to investors as well—in November 2021 The Wall Street Journal reported the average risk-adjusted annual return for built-to-rent investments reached 8%. The SFR industry continued its evolution as the asset class offered many more varieties on the home rental concept for both consumers and investors alike. Not only is BTR a new twist on the rental space, but rent-to-buy has also reemerged as another investment vehicle in 2021.
The year was not short on new mergers and acquisition activity, joint ventures, and entrants into the vibrant market. At this point SFRs have proven to be a resilient investment, run by forward-thinking creative minds and emerging from the pandemic as the number one asset class.
Following the “Best Year Ever”
While the growth seen in 2021 will be hard to top, the SFR market is poised for healthy growth in 2022 and beyond. According to PwC and the Urban Land Institute’s Emerging Trends in Real Estate 2022 report, single-family homes rank number one in both investment and development prospects. There is still untapped potential and room for the industry to grow. While there has been concentrated growth in certain metros, especially within the Sunbelt states, the share of SFRs owned by institutional investors is only about 1% of the national housing supply. Investors have begun to open up professionally managed rental opportunities in secondary and tertiary markets outside of the original and primary “Sand States” purchase footprint.
Both economic factors and shifting consumer preferences are converging to drive and sustain demand for professionally managed SFR homes. Those economic factors include record high housing prices and increasing mortgage rates that make renting more affordable compared to buying. According to the Radian Home Price Index, provided by Radian’s subsidiary Red Bell Real Estate, LLC, the median single-family home price as of March 2022 is $313,530—an increase of over $62,000 since the onset of the pandemic in March 2020. Now, with the average 30-year fixed mortgage rate rising above 5% in April 2022, the cost to purchase a home is even greater.
The housing shortage is expected to persist for years to come—especially for affordable homes. According to Realtor.com, the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021. That leaves a significant gap in available homes for purchase and a large population looking for rentals. While there are about 16 million SFR properties in the United States today, another 13 million rental households are expected to be formed by 2030, according to the Urban Institute.
Additionally, a new sophisticated class of renters has emerged who value the flexibility and ease of renting. Professionally managed rental communities appeal to Millennials and the emerging Gen-Z cohort who seek a high standard of living without the commitment of owning a home. According to a survey by the National Apartment Association, 43% of Gen-Zers indicated they would prefer to rent a single-family home rather than an apartment after graduating from college. Even many Baby Boomers who have been homeowners are opting for the no-maintenance living offered by SFR communities.
Where Are We Headed From Here
The growing number of people choosing to rent rather than own reflects changing attitudes about homeownership. The aforementioned Emerging Trends in Real Estate 2022 report from PwC and the Urban Land Institute predicts that SFR communities will become a core housing preference in American culture.
However, this consumer preference is based on certain expectations of quality and professionalism from their rental management company. The industry will need to continue to offer attractive advantages to retain tenants. It is critical for SFR operators to provide a flawless
customer experience in their managed communities, from well-maintained properties to quick repair service and superior amenities that fit the needs of tenants.
SFR developers must understand and design for what the modern renter wants and expects in a rental home. Tenants who are choosing to rent are not willing to settle for a property that feels like a downgrade from owning a home. The modern SFR tenant wants the best of both worlds: the convenience and affordability of renting with the comforts and advantages of single-family living.
The national housing market weathered the last crisis following the Great Recession, in part, by the creation of a new national and professionally managed rental homes in desirable suburban locations which came to be known as Single Family Rentals.
As we emerge from the pandemic, the mature SFR market is again playing an outsized role in reshaping the housing landscape. In many ways, the growth of SFRs has made a higher quality of life more attainable while also raising the bar for the rental market. As long as operators set market rate rental prices, treat tenants with the utmost professionalism, and properly manage their communities, SFRs can offer a new version of the American Dream that gives consumers flexibility and options for what they desire in a rapidly evolving gig economy.
While the real estate market has experienced rapid price appreciation over the last two years, the SFR industry has emerged stronger following the pandemic by offering stability and alternatives for investors and renters alike.
