SFR in the Age of Covid-19
How the coronavirus could impact the single-family rental market
At the start of 2020, the future was very bright for the single-family rental market. Rental demand was growing, and real estate investors had a clear and immediate opportunity to make money in the coming year. Tight rental inventory and funding seemed to be the biggest challenges that investors would face in the most desirable markets of the U.S.
For the savviest investors who were able to pay attention to emerging trends, there were no obstacles too large that could put a damper on the opportunities that lay ahead of them. However, that all changed with the emergence of the coronavirus. As we draw closer to the middle of the year, we’re starting to get an inkling of the virus’ impact on the global economy.
Let’s delve into the immediate impact this pandemic has had on the real estate industry, specifically on the single-family rental market.
Affordability Concerns
As the coronavirus continues to disrupt businesses and drive down the U.S. stock markets, there is a very real concern about how individuals and businesses will suffer as a result. During the last decade, low inventory in the single-family rental market drove the growth of rent prices. But for current and prospective renters who are dealing with loss of income, affordability challenges will be a growing area of concern.
According to CoreLogic’s Single-Family Rent Index, released in March 2020: “U.S. single-family rents increased 2.9% year over year in January 2020, down a bit from the gain of 3.2% in January 2019.” Also “increases in rents averaged 3% over the past year, which is more than double the rate of inflation over the same time period.” With rents increasing at double the rate of inflation, there is no question that this has negatively impacted affordability.
This is what poses the biggest future issues for investors who purchased SFR properties in areas of the U.S. that showed the most promise in terms of growing rents. ATTOM Data Solutions already reported that “single-family rental returns moderated in the first quarter as rents did not increase as fast as the price growth for investment rental properties.” That means investors already might not be seeing the returns they had initially hoped. While rental demand will remain in these areas of the country for the foreseeable future, rent may no longer be affordable for current or potential tenants. Investors may ultimately have to take a hit on their SFR investments and lower rent prices.
New Construction & Build-to-Rent
At the beginning of 2020, new construction and the build-to-rent niche were poised to become a much larger segment of the market for investors. However, with the onset of the coronavirus, these areas of the market now face a variety of obstacles to their growth.
First, short-term demand has fallen due to potential buyers being worried not only about their personal health and the risk of being in public, but also due to their financial health. The full economic impact of COVID-19 is still unknown. With so much financial uncertainty, it is unlikely for demand to remain strong in coming months.
There are also supply-chain disruptions to consider, both domestically and internationally. China, the world’s largest manufacturer, has been hit hard by the coronavirus. It is inevitable then that there will be a drastic reduction in available materials. Unfortunately, as factories and businesses have shut down in the U.S., there is no way to supplement this loss by producing materials domestically. And even if materials are currently available, fewer people will be willing or even able to work on new construction and build-to-rent projects due to mandatory work restrictions in many areas of the country.
What About Short-Term Rentals?
Travel is one of the industries hit hardest by COVID-19. That does not bode well for the current outlook on short-term rentals. Broad travel restrictions with indeterminate end dates means short-term rentals will sit without occupants for the foreseeable future.
Owners of short-term rental properties who may consider turning them into long-term rentals as a way to remedy the current situation face a different set of challenges though.
First, there is the issue of trying to find a tenant. Besides the obvious difficulties of trying to get a tenant in place during a pandemic, many short-term rental properties are in areas that are desirable to travelers but not to long-term renters.
Second, the home may require substantial maintenance, updating or a complete overhaul to be appealing to a long-term tenant. Often these issues are not a concern for short-term occupants.
Finally, there is the concern of cash flow. Will the property be nearly as profitable as a long-term rental as it was as a short-term rental? In most cases, probably not. If a long-term tenant does end up occupying the property, unless they are paying month-to-month or signing a short-term lease, the owner will not be able to use the property as a short-term rental until the existing lease expires.
On the positive side, short-term rental investors who are able to weather the storm should benefit from the huge travel boon that is most certainly to occur once the threat of the virus has dissipated. With folks adhering to self-quarantines, it is inevitable that people will want to get out and travel again at the end of all of this.
Which Way Will the Housing Market Go?
To set aside the doom and gloom for a moment, in a survey conducted by Redfin in March 2020, “about 40% of Americans anticipate that the recent spread of the novel coronavirus, also known as COVID-19, will have a negative effect on the housing market.” However, maybe more surprisingly, “half of the respondents expect no effect at all on the housing market, while 8.9% predict that it will have a positive impact-likely due to the recent drop in mortgage rates.” While there is still optimism that the coronavirus will have little effect on the housing market and home sales data from January into February pointed to a strong market, it’s still too early to say today what the future ultimately holds for tomorrow’s housing market.
