Single-Family Rentals Are Increasing in Popularity as Demand Surges

By The ArborCrowd Team
Aug 18, 2020

The label “single-family home” is generally assumed to be an owner-occupied house in the suburbs. While that’s still mostly accurate, the definition of that term has more recently expanded to include single-unit dwellings that have been repurposed, or even constructed, to house tenants.

The single-family rental industry is exploding to accommodate a shifting demographic of people who want to escape urban life, but lack the savings or credit to purchase a suburban home of their own. Millennials in particular are flocking to these rentals.

This asset class began rising in popularity across the country after the Great Recession of 2008-2009 caused a wave of foreclosures. The financial crisis led to a dramatic shift away from owning homes in the U.S. as the homeownership rate, which peaked at 69 percent in 2004, tumbled to 63.4 percent by 2016, according to the U.S. Census Bureau.

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Institutional management companies and well-capitalized investors noticed the spike in demand for rental units during and after the recession and began acquiring portfolios of single-family rentals to meet it.

Between 2005 and 2016, 3.8 million units of single-family rental homes were added to the housing stock, causing the inventory of single-family rentals to rise 34%, according to a 2018 study by the University of California, Berkeley’s Terner Center for Housing Innovation.

Currently, the Census Bureau estimates that there are approximately 16.5 million single-family rentals out of the nation’s stock of more than 40 million occupied rental units. The vast majority of single-family rentals are owned by “mom and pop” investors and institutional investors still only own a tiny fraction of the total units in the space, according to Forbes. However, having now seen the potential in single-family rentals, institutional investors are increasing their focus on this asset class and are developing “build-to-rent” single-family rental communities: essentially multifamily portfolios of dozens or hundreds of new single-family homes.

Approximately 228,000 single-family homes for rent were completed last year, up from 202,000 in 2018 and 198,000 in 2017, according to Census data. In the first quarter of 2020, 50,000 units were completed in the country, up from 48,000 in the first quarter of 2019.

The largest institutional owners of single-family rental portfolios are public real estate investment trusts Invitation Homes, which owns nearly 80,000 single-family rentals, and American Homes 4 Rent, which has approximately 53,000 homes, according to the companies’ latest public filings. Additionally, private real estate investment firm Amherst Holdings owns roughly 22,000 homes.

Lenders have also taken notice of the industry’s immense potential and strong return profiles and have increased available capital for the space. Arbor Realty Trust, a member of The Arbor Family of Companies, of which ArborCrowd is also a part of, is one the most active lenders in the industry, with single-family loan originations of more than $100 million. According to the Arbor Realty Trust and Chandan Economics Q2 2020 Single-Family Rental Investment Trends Report, occupancy rates for single-family homes across the country in the second quarter averaged 95.3%, which was the highest for the sector since 1994.

Single-family rentals are in high demand because they provide residents with the best of both worlds — the privacy and space of living in their own homes and the flexibility for life transitions, all while still being more affordable than buying a home.

For example, many respondents surveyed by the Terner Center for its study preferred single-family rentals over owning because of the freedom it allows in case of a major life event, such as getting married or divorced, or finding a new job, which could allow them to adjust their living situations quickly. At the same time, respondents also enjoyed the perks of the suburbs, such as private yards, decks, pools, driveways and garage spaces, and access to vibrant parks and great schools. Professionally managed single-family rental communities even provide tenants with additional communal benefits, such as institutional management, landscaping services, playgrounds, dog parks, barbeque pits, walking trails, and resort-style pools and fitness centers.

Tenants surveyed for the Terner Center study also preferred single-family rentals because owning a home has only gotten more difficult and expensive since the housing crisis. A tough job market after the financial crisis, the slow economic recovery and crippling levels of student debt delayed millennials in particular from homeownership.

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However, millennials (who are aged between 24 and 39 today) are now marrying and creating families, and therefore need more space at prices they can afford. Moreover, not just millennials, but baby boomers are also attracted to single-family rentals as many want to avoid high-rise buildings with stairs and noise, and others simply no longer want the hassle of caring for a home.

Although it’s too early to know with certainty how the COVID-19 pandemic will ultimately affect the continued growth of the single-family rental subsector in the medium to long-term, early data suggests that rents are still growing in the sector despite the U.S. economy contracting an annualized 32.9 percent in the second quarter of the year. However, since the asset class rose out of the Great Recession, it has some inherent traits of resiliency during turbulent times.

In fact, because of the pandemic, residents are putting a renewed focus on their personal finances and space, which may make all rentals, including single-family rentals, even more attractive. And since the pandemic, more businesses are allowing employees to work remotely, reducing the emphasis once placed on shorter commutes and potentially allowing people more freedom to choose single-family rentals in the suburbs.

Moreover, while the pandemic has affected all industries and sectors so far, some have fared better than others. From April through July, national multifamily rent collections have been relatively strong, helping the asset class outperform others, such as retail, office and hotels. As part of the multifamily industry, single-family rentals may also outperform other asset classes, and for the reasons mentioned above, it has the potential to continue growing well after the pandemic has passed.