There are few real estate sectors hotter than the single-family home rental business (SFHR). What started as a distressed opportunity following the Global Financial Crisis, is quickly becoming an institutional asset class.
The combination of demographics (aging Millennials) and accelerating trends such as remote work has led to strong demand and rent growth. From the operational side, advancements in technology have enabled owners to more efficiently manage a disbursed portfolio of single-family rental homes.
I’m bullish on the sector and believe single-family rentals are well-positioned to outperform over the long-term.
It’s early days in the sector. A Freddie Mac report released at the end of 2018 showed that only 1% of all SFRH, or about 188,000 properties, were owned by institutional investors. Roughly 88% were owned by very small investors with portfolios of 10 houses or less.
That’s changing quickly with institutional capital flooding into the space. Here are just a few of the recent headlines.
- According to Costar, a total of $8.4 billion across 14 commercial mortgage-backed security deals has been issued as of September. That is double the amount through the same time last year.
- Rockpoint teamed up with Invitation Homes, committing $375MM to buy SFRH’s in the sunbelt. With debt, the new JV has $1B in buying power.
- Nuveen recently announced a $400MM investment in Sparrow, a SFHR company targeting homes across the sunbelt.
- Global City Development partnered with Leste to form Cassa Life, to develop new SFRH’s.
- A Blackstone affiliate made a $300MM investment in Tricon Residential.
With capital and attention, comes innovation. This happened in the apartment industry and will play out in the home rental industry over the next decade. Today, approximately 6% of new single-family homes are purpose-built for rent.
Here are some of the things I’m pondering when it comes to the future of the SFHR industry:
- Are purpose-built SFHR’s going to be designed with a niche in mind such as young families or will builders design for a more general renter pool? What does the design look like for specific niches?
- Are single-family rentals going to be fully-furnished with flexible and adaptable furniture? I’d love to rent a home while I house hunt, but I’m moving from a 2BR apt and don’t want to furnish a house I’ll only be in for a year.
- Can SFHR’s remain rentals long-term or will the value appreciate to the point where it makes sense to sell? The single-family housing market and for rent market operate under different dynamics.
- Homeownership provides physical and economic security including collateral and leverage credit. Can this be replaced with other financial tools?
- Can renters stay in rental homes forever or will owners sell the home to an owner-occupier as an exit? This has significant implications for families with school-aged kids. Are these renters stickier?
- What role will the current recession play in the supply of SFHR’s? 5 million home loans (or 7.01%) are in forbearance which could be foreclosed on and scooped up for rentals.
- What role will AirBnB play in the space? The fastest-growing segment of their business is long-term home rentals.
- What will the impact be on the traditional garden-style apartment market? There are a lot of 3BR’s and townhomes within larger apartment communities that appeal to families.
- Is there a potential luxury SFHR market? I know high earners who would prefer to live in a house in the suburbs but aren’t ready to buy.
With institutional capital entering the SFHR space, it’ll be interesting to see what innovation emerges and how the sector evolves. I’m excited to watch it.
What are your views on the SFHR space?