SFR Still Has ‘Lot of Runway’ Before Slowing

The sector is a small segment of multifamily but is growing rapidly, argues columnist Lew Sichelman.

Lew Sichelman

The multifamily sector is “the darling” of commercial real estate, with investors who usually put their money in the office and retail markets clamoring to put their dollars to work in apartments, according to the head of Yardi Matrix.

But it is the build-to-rent segment, sometimes known as build-for-rent or single-family rentals, that’s really “booming,” the Yardi division’s Jeff Adler said on a podcast recently.

BTR is still a “super small” segment of multifamily, but “it’s growing rapidly,” Adler said on the New Home Insights Podcast produced by John Burns Real Estate Consulting, a new construction advisory firm based in Southern California.

“There’s like $11 billion that is committed to it, and there’s more coming,” he reported during the hour-long broadcast. According to the Burns firm, about 12 percent of all new single-family construction has been rental houses.

Adler, the vice president who runs Yardi’s data division, which covers a wide range of real estate-based assets, worked in the single-family scattered site rental business a decade ago when it first began to professionalize. Back then, the main issue facing investors was the need to develop technology to managed their hither and yon properties.

Now, he said, they’ve “done that enormously well…and the sector is booming.” And since it is still “really quite small,” he added, “there’s a lot of runway” in which to grow. “There’s a tremendous amount of demand.”

High Demand 

That demand is driven largely by two factors: One, Adler said, is the cost of buying a house and the need for a big down payment. The other, people still want the space single-family houses offer.

“The demographics are that more people are aging into their prime home buying years, and if they can’t buy a home because of cost, but they still need the space, single-family rentals that are purpose built are a great option,” he said.

“If you go back 25 years, 30 years, single-family (rentals) is following the same as multifamily did coming out of the savings and loan crisis. Same trajectory, same level of technology development, same level of developing new communities. This is a natural progression.”

Somewhat surprisingly, though, families with kids—the potential renters you might think would be the ones needing the extra space apartments don’t offer— haven’t found the niche, at least not yet, Adler reported.

“Families with kids, if they’re renting a house, want it an established school district. And that’s really scattered-site,” he explained. “What you’re getting is people who are couples with pre-school aged kids, or people with pets who need space and are willing to go out a little further to get that space.”

The resident base also includes people who can work from home and are willing to trade living a little further away from the central business district for more square footage, he added.

The key, he stressed, is “further out,” because to make the numbers work, land must be relatively inexpensive.

“It is on the fringes (that) you have to look at land use in the highest and best value…But those areas are growing rapidly, so it doesn’t take a lot to think, well, within five or 10 years, that section will (no longer) be on the fringe…That’s where my head is at…It’s great to see innovation in meeting consumer needs…It’s a very positive development.”

Adler also spoke about rents in the BTR sector, noting that prices were rising at a clip nearly twice that of apartments up until August—14 percent vs. 8 percent. In September, though, apartment rents rose by 10 percent while BTR rates went up a tad to 14.1 percent.

“But that’s still a big number,” he added. “Rents growing at that level probably are not sustainable forever. But the product type makes a ton of sense. There’s a need…and the economics are there.”

Adler also spoke in length about the multifamily market, which he characterized as “pretty hot.” “Rents have been just crushing it,” he pointed out.

Going forward, however, he expects the market to “return to a certain level of seasonality” in which September through February are the weakest part of the leasing year before accelerating again in March through August. It’s not that Yardi doesn’t expect to see rents no longer rise; they’ll continue going up, Adler said, but not at the same rate. Nevertheless, he added, “this is still pretty darn healthy.”

Nationally, Yardi, a primary source of intelligence and data for all types of income-producing property, is forecasting rents to rise in the eight to 10 percent range but falling back over the next few years as gains plateau to a more normal level and supply catches up to demand.

While the planning and permitting process varies by market, Adler also said apartment builders will deliver about 355,000 units this year and next. And he expects supply to ramp up even further in 2023, ‘24 and ‘25.

But the market is driven not just by demand for housing but also the demand from investors. When there is “a lot of money sloshing around—and there is a lot of money—and the cost of debt is very low and the prospect for revenue increases are stout,” he explained, it creates a grand opportunity for developers.

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