SFR Snapshot: Performance and Potential in a Turbulent Market
In an MHN Voices webinar, executives and analysts took stock of the forces shaping the sector.
After two years of booming growth in occupancy, rent and investment sales, the single-family rental sector offers more mixed prospects for 2024. Among other factors, a surge in deliveries looms over the next 12 months. Investors and developers remain optimistic about the industry’s performance in a turbulent economy, yet realistic about its structural challenges.
Those were key takeaways from the Dec. 14th webinar moderated by Multi-Housing News Editorial Director Suzann Silverman, which brought together SFR industry leaders on the asset class’ trends and opportunities.
The record development and transaction volumes of the past two years have declined considerably in 2023 under interest rates pressures, observed Yardi Matrix Research Director Paul Fiorilla.
“It’s down from the peak, but has surpassed pre-pandemic levels,” Fiorilla noted of those key indicators.
He pointed to the nation’s pipeline of 141,000 properties of 50 or more units, a projected 28,000 deliveries for 2024, and 2023 sales approaching $1.2 billion in sales as indicators of its potential. Huntsville, Ala., currently has the largest pipeline, with 2,492 units under construction, according to Yardi Matrix data.
“People are either moving because they want the amenities of a single-family home and they want the flexibility of renting as opposed to owning a home, or (they cannot) afford the down payment to buy one,” Fiorilla said. “With mortgage rates where they are, the cost of renting a home is far less than owning one.”
“There is a lot of uncertainty across a lot of different asset classes right now and a lot of different capital market tranches, but what we are not uncertain about is that there is a lot of demand for low-density housing,” observed James Ray, portfolio manager at MetLife Investment Management.
Mark Wolf, founder & CEO of AHV Communities, has seen these patterns before. “When I started this 10-plus years ago, I saw a lot of similar fundamentals that I do today, going forward; they were not directly correlated to the Global Financial Crisis, but we still have an interest rate crisis and housing crisis that persist today,” Wolf said.
Even with the high volume of investment and development, however, so far the SFR inventory is only a small factor in addressing the nation’s housing shortage. “We’re seven percent of all housing stock. We’re a drop in the bucket,” noted Mitch Rotta, senior managing director & head of build for rent at TruAmerica.
In the same vein, Rotta prescribed a reality check for investors and developers. “We went through craziness, and now we are back to normal—and everyone needs to reset their expectations around what is typical of a marketplace for rent growth, expense growth, basis and cost,” he cautioned. “We need to take our heads out of 2020-2022, because that was a moment in time,” he continued to caution.
Another driving force is the growing presence of institutional investors. By 2030, the share of SFR homes owned by institutional owners may reach 40 percent, according to data from MetLife.
“All the training wheels are off now, and you are going to see massive growth because of that acceptance on part of institutional investors,” Wolf predicted. That trend, he added, is further putting the squeeze on prospective renters as well as on potential homebuyers.
“It’s the Lennars and D.R. Hortons that are selling these houses in bulk that were supposed to go to a homeowner,” Wolf noted. “They are exacerbating a problem of affordability, and if no one can compete with them for market share, they can set the rents.” These concerns are drawing attention from Congress, where lawmakers recently proposed to ban SFR ownership by hedge funds.
Barriers to building
Despite that voluminous cash flows and development pipelines, the SFR and BTR sector has structural hurdles that show no sign of abating. One challenge is building new product as cost-effectively as conventional multifamily.
According to Forbes, single-family homes cost $329,000 to build on average, not including the cost of land. Further complicated by interest rates, development conditions will be less than ideal for some time. “As rates go down, prices go up,” Rotta observed. “The asset gets more expensive, the land gets more expensive, the infrastructure more expensive, labor got more expensive, a lot of it sticks around.”
Home prices are only headed up, in tandem with borrowing costs that remain elevated. “The new housing stock that is going to come on (line) in America is going to have a 10 to 15 percent increase on top of it over the next 24 months and that is not going to get any better,” Rotta said. Labor, too, is a challenge, with a shortage of skilled workers stalling construction.
Still, the rents that the properties are commanding make them attractive if investors also weigh location and demographics. For Wolf, these “geographic opportunities” are in line with “jobs, proximity to jobs, diversity in terms of employment, transportation arterials, and (the question of) can I be somewhere of importance in 20 to 30 minutes or less?”
And if investors and developers are disciplined and focus on long-term returns, they will create a housing model that is both profitable and affordable.
“Even if you have the most investors and equity, that’s a $2,800 to $3,500 rent check,” Ray detailed. “Is that affordable relative to the national median? Probably not,” Ray said. Yet to renters in the 70th income percentile who live in a high-demand suburb that are seeking good schools and breathing room, it’s highly affordable, he added.