A full decade has passed since the end of the Great Recession, and while most areas of the economy have regained their footing, the housing market is still trying to shake off the rust and figure out its new definition of normal. Homeownership rates have not returned to pre-crisis levels, as obtaining a home mortgage remains difficult and the lifestyle advantages for renting have become more apparent.
The multifamily sector continues to enjoy a renaissance from this cycle’s appreciable shift to home rentership. In more recent years, another corner of the market has emerged into the spotlight, as it too benefits from the changing landscape of how Americans are choosing to live: single-family rentals (SFRs). Nestled in the suburbs, SFRs’ attractive balance of abundant living space and access to quality public schools without the long-term commitment of homeownership are increasingly catching the attention of millennials as they begin to settle down and form families.
A Sector Is Born
Lower-priced assets in the recovery’s early days attracted large swaths of investors into single-family home purchases, and evolving demographic trends have kept them around. The sector’s strong fundamentals and long-term outlook, as well as improvements in property operations, have given rise to institutional interest in the SFR sector. As a national direct lender, my firm has stepped into the SFR space as well in order to help investors grow and expand their portfolio investments.
While attention on SFR has increased over the last couple of years, many are surprised to learn just how large the sector already is. Accounting for 25 million renter households, SFR makes up 66% of the entire U.S. rental stock. Further, SFR has been this cycle’s fastest-growing rental asset class, expanding by roughly 35% in the past decade alone.
Small and midsize investors have provided an asset acquisition pipeline for larger capital sources, and those larger players have provided downstream liquidity. This additional liquidity, coupled with sustained demand for SFR properties, should support the continued growth of the SFR market.
Improving Efficiency
For investors taking a hard look at the SFR space, the sector increasingly resembles the operational profile of multifamily. The advent of property management software now allows a portfolio of dispersed SFR properties to function with similar ease as a single apartment building.
Technology has sprouted the portfolio SFR owner, and in turn, the portfolio owner has solved the issue of stable cash flow. When an owner has just a small handful of properties, there is a pronounced reliance on stable occupancy. As an owner’s portfolio of properties grows, their single-tenant risk falls, and they can better manage their rent roll to their advantage.
The future impact of tech on SFR and commercial real estate as a whole is uncertain, but multifamily and SFR appear better situated to benefit from advancements than other sectors. As long as there are people, there will be a demand for housing. Until they figure out how to two-day ship three-bedroom apartments, residential real estate will remain relatively tech-protected.
Beyond The Balance Sheet
As the SFR sector continues to establish itself as a legitimate asset class and gain interest from new investors and capital sources, its benefits throughout local communities are coming into focus.
Owners of rental property must pay both local property and business taxes, meaning they are making significant contributions to their local public school systems. Further, SFR properties provide access to these same schools to a broader set of households, including lower-income families who otherwise would be unable to access them because of homeownership’s high cost burden. In short, SFRs strengthen their local communities while simultaneously providing affordable access.
Strategic Patience
SFR’s growth represents one of the more effective solutions in tackling our country’s multifaceted affordable housing shortage. A secondary market focused on affordable SFR could efficiently scale nationwide. Considering half of the country’s affordable housing needs are in non-urban neighborhoods, SFR is both a practical and powerful tool in addressing the issue. Best yet, it is a plan of attack that doesn’t require additional use of public funds.
In other words, some of the heavy lifting needed in affordable housing can be achieved by simply allowing SFR to grow unabated. If the sector expands naturally without interference, SFR stands to benefit renters, investors, taxpayers and homeowners alike. It may just settle in as America’s new favorite neighbor.