Why RCLCO Encourages SFR Developers to Ready Their Shovels
Columnist Lew Sichelman on the factors priming this multifamily segment for growth.
Could it be that developers of for-rent single-family houses have only scratched the surface in satisfying demand for their products?
It would seem so, according to a new report from real estate advisory firm RCLCO, which found that while just 40 percent of respondents to the firm’s new renter survey currently live in a low-density rental property, 72 percent said their ideal unit type would be a single-family house.
Of course, whether these renters can afford, let alone find, a low density rental property is a challenge. “But clearly,” the 2023 National Renter Consumer Preferences Report says, “there is strong interest.”
Given what RCLCO calls “the continuing structural under-supply of rental housing and strong market fundamentals,” the 31-page report also says “now is good time to be planning new multifamily and build-for-rent units” for the 2024-25 time frame.
Census Bureau figures for March showed that multi-family starts, which include apartment buildings and condos, fell 5.9 percent to an annualized pace of 559,000 units. And Robert Dietz, chief economist at the National Association of Home Builders, sees further softening in the sector in the months ahead because of “tighter lending conditions.”
Another factor: More than 950,000 apartment are now under construction, the most since November 1973, nearly five decades ago.
Nevertheless, as ownership alternatives have grown less affordable, the production of single-family build-to-rent products, which include townhouses and duplexes, has been on a tear. Yet, just 7 percent of all single-family starts last year were intended to be rentals.
At the same time, about a third of the U.S. population is comprised of renters, meaning, “there is a potential” for unmet demand, the Bethesda, Md., firm concludes. About half the renters said a single-family house was ideal, while 21 percent preferred either a townhouse or duplex.
The RCLCO report, which is intended to provide insights regarding who renters are and what they’re looking for in new rental housing, is based on replies from some 2,000 respondents from the country’s 150 largest metro areas MSA.
The respondents were screened for age (18+) and household income ($50,000+) as well as their intent to rent their next residence (definitely rent, or most likely rent), and current rent levels of $1,000 monthly or above. They also passed a quality control question mid-survey to ensure respondent attention.
Directing Your Spend
Besides their product druthers, respondents told RCLCO surveyors where developers should put their construction and design dollars. For example, they cared most about closets and kitchens. More than half said they would pay at least somewhat more for modern appliances and walk-in closets. “Kitchens and closets rule,” the report said.
An over-sized pantry also is important, but less so. And when it came to finishes like quartz or granite counters, hardwood floors and open layouts, renters were more and more willing to forgo these niceties in exchange for a lower rent.
Pool and fitness facilities are the favored recreational amenities. But resident security and package receiving ranked higher. Reflecting their concern about safety, the report said, residents value a front desk attendant or gated entry.
Overall, though, a community’s amenity package was more important to younger people seeking traditional multi-family residences or houses in small single-family properties. Interest wanes among older renters and people preferring larger detached houses.
Renters also were willing to pay more for green attributes, if only because they save occupants money. Indeed, of the 54 percent of those who would pay a higher rent, three-quarters would do so if it resulted in a lower energy bill or made them more comfortable. Only 25 percent would do so for altruistic, environmental reasons.
Meanwhile, after SFR rents slowed “more than usual” in last year’s second half, John Burns Research and Consulting now reports tariffs rose more than usual in Q1-2023, suggesting what the Irvine, Calif.-based company says is “cautious optimism” for the sector.
Burns, which tracks asking rents on available houses owned by the 23 largest SFR operators, also found that rents on units put back on the market after a tenant vacates the property rose in almost half the cases. And in about half of those, rents went up by 5 percent or more.
However, for not quite a third of the houses, rents remained flat. But rates were lower for about a fourth of the properties when coming back on the market.
The SFR firms tracked by the Burns company own more than 375,000 units.