Experts Discuss Growing SFR, BFR Markets

The single-family rental and build-for-rent market has heat up in the past year, attracting the attention and capital of a growing number of well-known institutional investors.

But a panel comprised of a leading SFR owner/developer, industry consultant and capital and investment intermediaries say it’s not just a pandemic-driven phenomenon.

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“The trend was there before COVID and the trend is going to continue long after COVID,” said Jon Ellenzweig, chief investment officer at Tricon Residential, and one of the panelists on a webinar Wednesday entitled “Everything You Need to Know about the Single-Family Rental & Build-for-Rent Market,” hosted by France Media and sponsored by Walker & Dunlop.

“It accelerated the trend. It didn’t start the trend,” agreed Don Walker, managing partner & CFO, John Burns Consulting.

Ellenzweig noted household formations are growing at rates faster than home development and Walker said home prices are escalating rapidly causing more people to choose to rent. Walker added significant student loan debt has also hurt the ability of many younger renters to save for a down payment to buy a home.

Mark Peterson, director of the BFR division of SVN|SFRhub Advisors, noted a lot of people just want the flexibility of renting rather than buying a home. The pandemic did accelerate several trends including increasing movement to Sunbelt states. Young families also wanted a larger number of bedrooms, more space for work from home and homeschooling needs as well as yards.

Of the 45.7 million household renting homes, about 15 million to 16 million households are renting in the single-family market, Walker said. About 7 million range in age from 25 to 44 and about 5 million range in age from 45 to 64, with an average renter age of 40, he said.

About 53 percent of the SFR renters have pets, which are extremely important to them, and many have college degrees, are married with children and make between $70,000 and $100,000 a year.

Asked why institutional investors are increasingly active in the market, Walker said occupancy in SFR properties are at a 25-year high across the U.S. with average occupancy of about 98 percent.

“The market is doing very strong from an occupancy level,” Walker said, adding SFR rents have also been more stable than multifamily rents.

Who’s In

Walker outlined the capital that has been flowing into the space from institutional investors since 2020. There were two major announcements in March.

Lennar Corp., one of the nation’s largest homebuilders, launched a $4 billion BFR platform with Centerbridge and Allianz Real Estate and other institutional investors.

The Great Gulf Group formed a SFR partnership with Westdale Real Estate Investment and Management and a global institutional investor with $200 million in equity to build 1,000 to 2,000 BFR homes a year. The partnership is initially targeting markets in Texas, Florida, Georgia, Arizona, South Carolina and North Carolina.

In January, Avanta Residential, the SFR division of Hunt Cos., formed a joint venture with Iron Point Partners to develop BFR properties across the United States, Walker said.

He also listed eight significant investments in the SFR market dating back to May 2020 by Koch Industries, JP Morgan Asset Management, Brookfield Asset Management, Blackstone Real Estate, Nuveen Real Estate, two by Rockpoint Group and Pretium Partners and Ares Management.

In January, Pretium and a group of its investors, as well as funds managed by the Real Estate Equity and Alternative Credit strategies of Ares acquired Front Yard Residential Corp. in a $2.5 billion deal to take nation’s second-largest SFR owner-operator private.

Within two weeks in October, Rockpoint Group entered into a $250 million deal with Resicap and a $375 million joint venture with Invitation Homes, the nation’s largest single-family rental owner, to deploy more than $1 billion into acquiring and renovating properties across the Southeast.

And Walker expects there will be more significant investments to come. “We think it is in the very early innings as an institutional class,” he said.

Keaton Merrell, managing director at Walker & Dunlop, said one of the impacts of the pandemic was investors who were avoiding sectors like hospitality, retail and office becoming very aware of the SFR market.

“I’ve seen more equity term sheets than debt sheets,” he said. “That’s why we’re seeing big names.”

Where are the Investments?

Moderator David Howard, executive director of the National Rental Home Council, asked Ellenzweig where Tricon sees the most opportunity. Tricon currently owns and operates about 23,000 SFR homes and has a total of 35,000 rental units in the U.S. and Canada.

Ellenzweig said the company focuses on markets with population and employment growth ideally above the U.S. national average. He said the households tend to have annual income ranging from 60,000 to $120,000 and pay rents ranging from $1,200 to $1,800 a month.

Ellenzweig said he expects the “vast majority of growth will be in 18 markets,” including Atlanta; Dallas; Phoenix; Charlotte, N.C.; Nashville, Tenn.; Tampa, Fla.; and Las Vegas. He said they would also be looking at Austin, Texas, and Greenville, S.C.

What’s Next?

Peterson said they are seeing more homebuilders entering the SFR market with a BFR model ranging from local and regional builders to large companies like Lennar and DR Horton Inc.

He said doing deals of that size will change the capital stack. Merrell noted that BFR is still a “relatively new product type” and some financial institutions are still figuring out how to work with them. He said SFR and BFR are not interchangeable, adding Freddie Mac and Fannie Mae are only working with BFR deals.

Merrell also said there are not enough banks in the space, particularly for deals that are $20 million or smaller.

Ellenzweig predicts more segmentation within the BFR market, for example more 55 and up BFR developments. He also expects there will be more institutionally managed properties and more acceptance by developers going forward to build BFR as well as for-sale homes.

Tricon owns and manages more than 30,000 multifamily rental units and single-family rental homes in the U.S. and Canada. The company has been investing in recent years in the SFR market in the U.S., which has been growing and attracting interest from institutional players like Blackstone Group.