The SFR Sector Has Grown Up, for Better and Worse

Mark Wolf

The single-family rental sector today is all the rage, dominating the news and industry conversation.

Surging with both capital and renter demand, numerous organizations— including some of the nation’s largest public homebuilders—have entered the space to capitalize on the opportunity.

Amid the COVID-19 pandemic, the sector has been further catalyzed as an increasing number of renters over the past year have sought larger, increasingly flexible spaces in which to live and work comfortably while reducing infection risk. Demand in secondary markets has notably expanded in response, with urban dwellers exiting city cores for suburban rentals.

While all signs point to an overheated market, not all participant business plans are well designed, nor will they likely stand the test of time. In all the excitement for short term return on investment, many players are essentially selling an inferior, or, in some cases, outright bad egg. Problematic single-family rental business plans often fail to adequately address asset maintenance, align location with desired renter demographics, aim to benefit the surrounding city or town or ensure continued ROI beyond the immediate time frame. Ultimately, the SFR communities destined for success, attracting quality residents and holding long-term asset value, are the ones designed, operated and managed like a well-oiled multifamily community.

A look back

The institutional single-family rental business got its start during the Global Financial Crisis just over a decade ago when home foreclosures rose to unprecedented levels and banks were left trying to offload distressed assets in bulk. The investment community discovered an opportunity, purchasing homes at auction and amassing portfolios to rent to the growing number of Americans then unqualified to own a home. While these investors provided a partial solution to the immense real estate distress, their rental model, which still persists today, isn’t void of issues. With homes disparately located, onsite maintenance of these rentals is nearly impossible and an unacceptable lack of care of rentals belonging to certain investor owners has been widely and nationally reported in investigative exposes.

While institutional capital did widely pursue this original SFR model, the investment community was initially highly wary of new development, believing the opportunity to buy homes at huge discounts and have them rebound in price via home price appreciation (i.e., the buzzword of Wall Street circa 2012) was perceivably greater. Notably, most failed to recognize the financial legitimacy of the new ground up master-planned rental communities. However, the tides have officially turned. The Wall Street Journal recently reported that “individuals, family offices, pension funds, and Wall Street’s boldfaced names are shoveling billions of dollars into build-to-rent opportunities.”

The gold standard: communities operated like apartments

Today, only a handful of players are delivering contiguous master-planned SFR rental communities. Even fewer still operate a vertically integrated business, building and maintaining the communities themselves. Lately the country’s larger homebuilders have taken the sector spotlight, many delivering homes en masse to investors who then take over leasing and management. This disjointed model seeks immediate ROI to fuel quarterly earnings, is less concerned about long-term renter engagement or regional impacts and may, in fact, result in a real estate bubble.  

Arguably, the gold standard model for the built-to-rent SFR community is one that is functionally integrated, where communities are well located, offer superb amenity packages, are professionally leased and managed onsite, and ultimately are treated and operated like a traditional apartment business.

Location and demographics still matter

The old real estate fundamentals surrounding “location, location, location” remain as true as ever with single-family rental communities. Location of master-planned SFR communities directly influences unit demand, the quality of the renters and ultimately, long term return-on-investment and asset value. Yet industry participants working to deliver single-family rental communities today do not appear to be equally discerning about location and value creation. Unfortunately, they may pay the price down the line when regional employment growth wanes, supply outpaces demand, units sit empty and proper maintenance becomes financially unfeasible, resulting in degraded asset value and ROI.

Optimally located built-for-rent communities address the housing needs of the country’s two largest cohorts: the Boomers and the Millennials. Boomers are attracted to SFR living as a move-down option. They enjoy turning over maintenance tasks for a headache-free, lock-and-go lifestyle. Millennials often seek SFRs as a precursor to home ownership and/or an option that gives them more space. Leasing demand from both of these generations is now surging in key growth regions that offer an attractive life balance and cost of living advantage. Metro regions within Texas, Colorado and the Southeastern U.S. are quite popular.

What’s to come

Luckily, the investment community has finally acknowledged the optimal built-to-rent SFR model and is actively funding the development of well-planned communities throughout burgeoning U.S. markets in need of housing. On the other hand, it remains to be seen how much the poorly executed single-family rentals, fueled by low interest rates, will impact the health of the real estate industry as well as the regions in which these rentals are being placed. At some point, the overheated market will be forced to adjust and the players who have always focused on long-term community success and value may be the last ones standing.

Mark Wolf is co-founder & CEO of AHV Communities, a San Antonio-based pioneer and leader in master-planned single-family rental home communities. To date, the company is responsible for the delivery of 3,800 rental units/lots worth a value of approximately $1 billion. Visit AHV Communities at www.AHVCommunities.com and contact Mark Wolf at mwolf@ahvcommunities.com.