By Robert Koch, Fugleberg Koch
The rental industry has long provided apartments for the resident unable to qualify for or un-attracted to single-family home ownership. A detailed examination of the single-family inventory in most markets nationwide reveals that a historic average of 15 percent of all single-family homes are not owner-occupied. A meaningful segment of these are rental homes independently owned and rented as investment property.
While this single-family rental sector may appear at first to be of little consequence, by comparison to the product specifically designed, built and operated to this market, it is likely the most underserved rental segment of all. Furthermore, all indications suggest this sector will grow measurably in the coming years.
Market conditions are changing
A paradigm shift is underway. The precipitous events of the mortgage credit crisis have resulted in a variety of changes to consumer and market conditions worthy of note. For starters, mortgage defaults, and the resulting short sales, have brought many homes back to market as investment assets, only to be poorly managed and maintained by casual or absent ownership.
Buyers caught up in mortgage defaults have been thrust back into the rental market with compromised credit capacity, finding their only housing option as privately owned shadow inventory. Meanwhile, record-low interest rates have not spurred a buying frenzy, as mortgage underwriting has reached for higher credit scores and equities greater than what many can qualify for.
Property value declines (from surplus default inventory) have made new construction less profitable, resulting in a significant decline in new single-family housing starts. And confidence in the future appreciation of housing values has been damaged, and belief in home ownership as an investment strategy has been seriously compromised.
As a result, the rental market is experiencing an expansion of demand for that segment that once left apartments for the benefits of single-family offerings. This unfolding demand is looking for key features found in single-family communities while simultaneously desiring the service and lifestyle benefits found in quality rental developments.
The primary motives to move from an apartment to a house are often vested in four key demands: greater sense of security, improved privacy, more storage and private outdoor space.
Initial review would lead most to think the single-family product could not be financially effective as a rental apartment community. There is strong evidence that this might not be the case, particularly when the development team compares building and operating costs of single-family developments to those found in apartment communities.
Analyzing a new multifamily dynamic
To aid in a cost overview, consider the following:
■ A wholly owned single-family rental development need not be confined by plating standards that often limit density and operating efficiencies and demand public standards on internal infrastructure. Densities of up to 10 units per acre detached can be achieved with sites that permit clustered approaches.
■ Construction costs per unit for like-sized single-family product is cost-equivalent to apartments of like-size. Projects realize significant savings that can offset the added cost of exterior envelope that can be measurable. Single-family building codes and regulations can apply, avoiding pricey rated assemblies, common area exit assemblies, fire protection and hard wire alarm systems, and usually mandated accessibility standards.
■ Market expectations when renting homes vs. apartments are measurably different. Apartment operating costs often include services that are expected as added costs when the rental home alternative is entertained. Garbage collection, yard and pool maintenance, and pest control are a few add-on costs when residents consider independently owned rental homes.
■ Finding a rental home in a lifestyle community is difficult, if not impossible, in many neighborhoods. Rental homes in gated communities often carry added fees that consumers expect to pay.
■ Resident turnover is reduced as home rental occupancies have longer tenure than national apartment averages, and for the younger resident, loses occupancy to relocation or ownership, and not newer competition.
Another factor to weigh is the shift from shared amenities toward more family-friendly appointments. This trend is reducing the need for higher capitalized common areas and lowering operating costs on clubhouse facilities.
Also consider that the future of home ownership is forecasting higher interests on mortgages as well as the potential elimination of long-term, fixed-rate loans. In addition, we are looking at a possible elimination of the interest tax deduction on primary homes, and the preservation of higher credit standards for borrowers than in the past.
Young buyers have become less eligible and are more concerned about stability of purchase values. Meanwhile, seniors have been migrating to lifestyle rentals in an effort to lower the burden of ownership and reclaim equity as a liquid investment. Combined, these will expand the number of rental homes the market will demand.
The rental apartment developer is best poised to address this dynamic. With careful site selection, smart product and efficient planning; revised operating methods and a measure of bravado, the first to consider this alternative will be the early beneficiaries of this new future.