Highlighting a Rapidly Growing Asset Class: Single Family Rentals

Three Puzzle Pieces for Successful Investment

The single-family rental (SFR) space is one that many consider fundamentally similar to the multifamily asset class, but also one that investors may not have as much familiarity with on the RealtyMogul platform. In this article, we highlight some of the key drivers of this rapidly growing market referred to by certain researchers as the new face of rental housing.1

Performance

Proponents of the SFR asset class have highlighted single-family rental’s risk-adjusted performance as a major reason for optimism. Independent researcher, Green Street, analyzed data to determine risk-adjusted returns across 18 private investment asset classes. In late 2021, Green Street determined the risk-adjusted return for single-family build-for-rent was about 8% on average versus a 6.1% weighted average across all property sectors. Additional data highlights the reduced volatility and risk of this asset versus the S&P 500 as measured by the Sharpe ratio. Within Andrew Demers and Andrea Eisfeldt’s 2021 paper entitled “Total Returns to Single Family Rentals,” SFR achieved a total return of 8.5% combined with a Sharpe ratio of 1.14 over a 28-year period starting in 1986. While the S&P 500 index outperformed over this same period, there was more associated volatility and risk, as the Sharpe ratio was .52 (higher Sharpe ratios imply higher returns after accounting for risk).

Hikes in rental prices appear to have hit the single-family market more drastically than multifamily of late, leading to increased revenues for operators in this space. Dwellsy, a marketplace for single-family rental properties, reported that the jump in rent prices from 2022 in their single-family rentals outperformed growth in the multifamily sector by a significant margin. SFR median asking monthly rents were up 37% year over year compared to multifamily median rents being up 6.5% year over year.

This performance is consistent with Deloitte’s 2022 Real Estate Mergers, and Acquisitions report that noted SFR rental income has “consistently outpaced those of conventional apartments—in some neighborhoods, from 6% to more than 11%.” 2 These rental increases combined with stickier tenancy (lower turnover that is common to this asset class) have contributed to strong performance, especially when compared to other commercial real estate assets.

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Supply and Demand Data

Consumer demand for rental housing has driven significant growth within this asset class. PWC’s 2023 emerging trends in real estate report found that 35% of renters with budgets of over $1,000 per month are renting by choice, meaning they could afford to purchase a home, but have elected to rent for various reasons.3 Many renters are citing flexibility, less maintenance, and fewer financial responsibilities as some of the reasons they have avoided buying. Additionally, some of the primary drivers of the move from renter to home purchaser (such as needs for privacy, garage space/storage, and the ability to have pets) are readily available in single-family rental homes. As a result, fewer individuals are seeing reason to leave SFR in order to buy. In total, 18% of current millennial renters indicate they plan to rent forever.4

For those renters looking to buy, housing affordability, which is at its lowest level in 30 years, has been cited as the main reason why they are currently renting.5 With a potential recession looming, pricing concerns could be exacerbated as individuals have even less to contribute towards a new home. Moreover, many see the SFR space as countercyclical, as more individuals tend to rent during recessions. With interest rates rising dramatically in the first half of 2022, John Burns Real Estate Consulting estimates that “the number of US households who can afford a $400,000 mortgage has dropped by 16.5 million.”6 If interest rates continue on this trend, the single-family rental market may be a necessary alternative for these households, even if there is a minor correction in home prices.

Consumer demand for single-family rentals has certainly benefited from supply constraints. Per PWC’s 2023 emerging trends in real estate, housing construction is currently “far below population growth” due to issues like labor shortages and rising cost of materials.7 Many developers are struggling to increase supply with these issues on top of rising interest rates that increase their cost to develop. Vacancy across single-family rentals was ~ 5.1% nationally in Q2 of this year, signifying a glaring need for new development. This represents the lowest vacancy rate in the space in more than two decades, per the US census bureau, which may sink even lower if current trends continue.8

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Asset Class Growth

Even those familiar with the single-family rental markets may be surprised to hear that the estimated market value of this space is now approximately $4.5-5 trillion, according to a 2021 report from John Burns Real Estate Consulting. According to the National Association of Home Builders, 13,000 new single-family homes started as rentals in the first quarter of this year, up 63% from a year ago.9

Further evidence of demand in this space has been the flood of institutional capital coming into the asset class. Blackstone and Independence Realty Trust have invested over $13.5 billion combined into acquiring and developing single-family rental units.10 PWC expects institutions will continue to flood capital into single-family rentals over the next decade. While institutions currently own about 5% of this market space, that figure is expected to grow to 40% by 2030 per their 2023 Emerging Trends in Real Estate report.11

View single-family rental (SFR) opportunities currently open on the RealtyMogul Platform.

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This article is for informational purposes only and is not a recommendation or offer to buy or sell securities. Information herein may include forward looking statements and is for informational purposes only. Forward-looking statements, hypothetical information, or calculations, financial estimates, and targeted returns are inherently uncertain. Past performance is not indicative of future performance. None of the opinions expressed are the opinions of RealtyMogul. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks and tax consequences associated with any real estate investment.

1 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-2022-real-estate-m-a-outlook.pdf

2 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-2022-real-estate-m-a-outlook.pdf

3 https://www.pwc.com/us/en/industries/financial-services/images/pwc-emerging-trends-in-real-estate-2023.pdf

4 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-2022-real-estate-m-a-outlook.pdf

5 https://www.pwc.com/us/en/industries/financial-services/images/pwc-emerging-trends-in-real-estate-2023.pdf

6 https://www.pwc.com/us/en/industries/financial-services/images/pwc-emerging-trends-in-real-estate-2023.pdf

7 https://www.pwc.com/us/en/industries/financial-services/images/pwc-emerging-trends-in-real-estate-2023.pdf

8 https://www.arborcrowd.com/real-estate-investing-learning-center/single-family-rental-build-to-rent-numbers-continue-to-impress/

9 https://www.cnbc.com/2022/06/10/big-landlords-jump-into-the-homebuilding-as-demand-for-single-family-rentals-surges.html

10 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-2022-real-estate-m-a-outlook.pdf

11 https://www.pwc.com/us/en/industries/financial-services/images/pwc-emerging-trends-in-real-estate-2023.pdf

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