Smart Strategies for SFR Site Selection
Deciding where to build these projects is challenging. Here's what to consider.
Developers, investors and managers of single-family rental communities have a busy year ahead of them. Yardi Matrix data shows that 141,000 properties of 50 or more units are under development across the U.S., with 28,000 of those expected to deliver this year. Fundamentals are solid, too. Occupancy sits at a cool 95.8 percent, while average rents increased 1.2 percent year-over-year.
Driving the sector’s expansion is the complex process of deciding where to build. Economic, demographic, legal, and political factors all influence this decision, which is central to an SFR community’s success.
Following the U-Hauls
A favorite expression of Joshua Pristaw, senior managing director & head of real estate at Pretium, is “Follow the U-Hauls: Both where people are moving, and where the job growth is.” His comment speaks to a fundamental step in site selection: assessing who would live in a prospective community.
It’s no secret that the Sun Belt remains the biggest hotspot for development, boosted by corporate and renter relocation, relatively low regulatory hurdles and other factors.
But who exactly is driving the U-Hauls? It’s primarily Millennials in their 30s and 40s, a group that “overwhelmingly wants a single-family home,” according to Pristaw, but may have qualms about affordability and maintenance.
Many have outgrown apartment living, but do not want to deal with the hassles of home ownership. “They have a spouse (and) a young child and the two-bedroom does not work anymore,” said Tanner Maddux, chief investment officer at Sunstone Two Tree. “They need a yard, they need space, they need an office for Zoom calls.”
Parcels of possibility
When it comes to location, the consensus appears to be that proximity to large employers is the top priority for residents. An ideal location is about 30 or 40 minutes from a central business district. That appeals to middle-income renters working in such fields as regional manufacturing, distribution, law enforcement, health care, construction and insurance, Maddux said.
Other major concerns for residents are transportation corridor access, retail options and local amenities. School quality is an important consideration, since many prospective residents are families with young children.
All that adds up to a demand for suburban living. For Matt Scarola, head of investments at Integra Multifamily, prospective SFR renters are seeking an “intersection” of opportunities, one that has “proximity to jobs, but is not too far out to the point where you lose the interest of the younger cohort that is most interested.”
Immediate surroundings matter, as well. One quality that Capital Square looks for is a degree of “vibrancy” that offers residents “access to the neighborhood that they would truly like to live in, (one with) eating, entertainment” and other attractive features, said Jon Trott, the firm’s co-chief investment officer. And for Pristaw, the ideal single-family rental site is one where “the neighborhood itself is an amenity.”
The optimal end product
When ResiBuilt Homes has selected a site and is determining what to build, “The first thing we look at is what each parcel is zoned,” noted Jay Byce, the firm’s president. That leads to a mix of variety and consistency in design. “We are looking at what homebuyers are looking for,” he said. “That could be single-family detached, townhomes or even cottages down in Florida.”
Other strategies are best patterned after those of conventional for-sale single-family homebuilders. Capital Square generally prefers to build on larger land parcels, making projects “more horizontal than they are vertical,” according to Trott. For efficiency’s sake, the firm typically includes seven to 15 units per acre, with projects often exceeding 100 units.
That said, Capital Square is also mindful of a larger community’s needs. “Laying infrastructure tends to be a large thing we do,” said Trott. “if it’s an area that has subsurface rock and trees, you have to level them to build those things out.”
All these considerations point to a key question: How many units should be built? Communities with a minimum of 100 units tend to be the most efficient to operate. Scarola noted that multiples of 100 are the best fit for payroll management, since SFRs typically hire one management and maintenance professional per 100 units.
Still, a developer’s dream community may not be feasible. “To be able to buy enough land in a semi-urban area in South Florida to build 100 homes is nearly impossible these days for this kind of product,” Scarola noted. Additionally, communities that are too big take longer to lease up, according to Maddux, who considers 150 to 200 homes to be the right size for an SFR development. “If you’re one of the massive properties with 500 units, that is going to take a long time to lease up,” Maddux said.
SFR meets NIMBY
Land availability, quality and operating feasibility are not the only challenges that SFR developers and investors face. In most areas, the consensus seems to be “that growth is good, as long as it’s not near me,” Byce said. He finds this opposition unwarranted, since the finished product is essentially the same as a conventional single-family home. “We believe that a house is a house. What we build is exactly the same type of stock that people are buying; we are just giving them a different (way) to use it,” Byce told MHN.
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However, sometimes the opposition is built-in. Single-family rental communities are, by definition, less dense than apartment communities and building in the suburbs restricts developers’ choices of location.
“It’s harder to make the numbers work for us than for an apartment developer on a well-located site,” Maddux explained. “Typically, the developer will win, because they can just put twice the number of units per foot of land as the single-family guys,” Maddux added.
Being pushed farther out in the suburbs doesn’t help, either. Still, sentiment may be shifting, given the severity of the housing shortage and the fact that professionally managed rental communities often add value to a neighborhood.
“As more of these communities have been established, and you see American Homes for Rent and Invitation communities buy more homes, I think that the bias has become less negative.” Maddux said.
This recognition of SFRs’ potential to expand the housing inventory has impacted policy. “It has been an interesting collaboration between single-family developers and multifamily (zoned) municipalities, a lot of which have changed code to adapt for our product,” said Maddux.
