What’s Next for Single-Family Rentals?

Mark Wolf

A year ago, single-family rentals were real estate’s most sought-after investment. Everyone from the country’s top production homebuilders to institutional capital sources, as well as everyone in between, had all jumped in. The market was exploding in new development pipelines as well as overheated with equity and extremely cheap debt. However, a lot can occur in a year…and it has.

Over the past many months, we’ve witnessed the sector’s explosive rent growth and a dramatic slowdown of the absorption rate. Leasing seasons have re-emerged in a sector that isn’t used to them and attracting new tenants has become more challenging. As a result, community-to-community leasing competition has heated up markedly in the hunt for fewer renters. While spring and summer will likely register a spike in leasing activity, the seasonal demand is expected to ebb again in the upcoming fall and winter months.

The capital markets have also weakened dramatically over the past year. Once inflation hit its highest annual jump in 40 years back in January 2022, interest rate hikes quickly followed and the consequences have been staggering to the downside. Community and regional banks, which lead all lenders in commercial real estate lending volume, as well as their larger national institution counterparts, another major source, have essentially halted finance activity, or if active are extremely selective and offer lower leverage at higher costs.

Debt is now 300-400 basis points higher in cost than it was just a year ago and that’s if you can even access it. Amplifying the issue is the massive volume of commercial real estate debt coming due. According to a recent Bloomberg article, nearly $1.5 trillion in commercial real estate loans are scheduled for repayment before the close of 2025. In this highly constrained lending environment, many of these properties will struggle to get refinanced.

Institutional investor interest in SFRs has likewise decreased. These equity sources have moved to the sidelines and, for the time being, are extremely hesitant to invest in the development of new communities. Those in the market seeking equity are now turning to other sources, such as the high net worth and family office cohort, while institutional capital sources are instead setting their sights on distress opportunities. Many of these institutional investors view what’s happening today as comparable to what occurred during the Global Financial Crisis. However, any single-family rental sector distress that occurs will likely pale in comparison.

Of course, costs are also higher to develop today, in large part due to inflation and lingering supply chain challenges. All told, we are witnessing the beginning of a perfect storm in single-family rentals.

Opportunity Knocks

Amidst the turmoil, and projects challenged by any number of factors, one clear need has emerged in the industry solutions. Many developers, landowners and equity capital allocators are finding they aren’t well enough equipped to deal with the onslaught of difficulties they face with their assets. With competition even greater, they also can’t afford to get anything wrong. Thus, many are seeking third-party expertise and execution, which is in extremely short supply. Whether site analysis, design, development or general contracting related, outsourced execution is in demand. However, these services are a good thing for the industry as they will improve the chances that some of these hard hit SFR developments survive and thrive.

What remains unchanged, and perhaps has become even clearer, is that the contiguous single-family rental home community is the most noteworthy residential concept introduced in the past two decades. While renting a detached home is not a new concept, living in a purpose-built, fully amenitized community of single-family homes is unique and special. When these developments are executed well in ideal locations, and the homes and community at-large are superbly managed onsite, it’s an investment whose value is nearly guaranteed over the long term.

In other words, the challenges of the day, even if they lead to an official recession, may rightsize the single-family rentals sector, but they won’t thwart the prospects of well-done SFR communities in the long run. The product remains highly attractive to a wide variety of renters who can’t afford, or prefer not, to purchase homes. And while debt today is scarce, and institutional investors have shifted their focus, both will return to the sector once economic conditions are resolved.

Mark Wolf is founder and CEO of AHV Communities, a pioneer and leader in Built-for-Rent® single-family rental home communities.