Institutional Capital Intensifying its Focus on Single-Family Rental (SFR) and Build-to-Rent (BTR) Assets

By The ArborCrowd Team
Feb 16, 2022

Single-family rentals (SFR) and build-to-rent (BTR) communities saw strong market demand in 2021, which fueled unprecedented institutional investment for the asset class. Institutional investors dramatically increased capital investments for the SFR and BTR sector to $45 billion last year, according to John Burns Real Estate Consulting.

Additionally, there was more than $14 billion in commercial mortgage-backed securities (CMBS) issued for SFR properties through October 2021, according to Trepp, representing an approximately 43% rise from $9.8 billion in 2020, and a 241.5% increase from $4.1 billion in 2019. More institutional capital is expected to target the SFR and BTR space because of market trends and demographic shifts.

SFR and BTR Investment Grows with Strong Market Fundamentals

SFR and BTR investments have proven to be resilient despite the COVID-19 pandemic, leading to more interest from institutional investors. Through the pandemic, CMBS delinquency was generally under 1%, meaning that the properties continued to perform, according to Trepp.

In fact, rent growth expanded 14.7% for SFR properties year-over-year in November 2021, according to Yardi Matrix, and national average occupancy steadily increased to 95% by the third quarter, according to Arbor Realty Trust’s quarterly report.

While the pandemic devasted sectors that rely heavily on in-person interaction, such as office, entertainment and hospitality, the impact of the virus boosted demand in SFR and BTR by accelerating the trends of people wanting more living space and the migration to the suburbs and small cities in the fast-growing Sun Belt and Mountain West regions.

As demand for homes skyrocketed amid an ongoing national housing shortage, home prices increased to record levels, and many people — particularly millennials — who wanted to buy a home, could no longer afford one. SFR and BTR properties became an ideal alternative that allowed residents to achieve the flexibility and affordability of renting while living in homes in great neighborhoods.

An Asset Class Poised to Scale

While institutional investors have begun to enter the SFR and BTR sector with a great deal of capital, large investors still comprise a minuscule part of the overall SFR and BTR market, allowing tremendous opportunity for scaling of the asset class.

Industry data suggests that institutional companies only own 2% to 3% of SFR homes, and about 88% of the market is owned by non-institutional investors who operate five properties or less, according to RCLCO Real Estate Consulting. Comparatively, institutions own approximately 55% of multifamily assets, according to various sources.

For institutional ownership of the SFR and BTR market to increase from 2% to just 10%, there would need to be an infusion of $200 billion in debt financing, according to MetLife. Currently, life insurers, which hold nearly $600 billion in multifamily debt, have less than $10 billion of mortgages in the SFR and BTR space, MetLife explained.

More institutional capital is expected to flow into SFR and BTR properties as investors have high demand for resilient assets. Moreover, institutional investors now have multiple viable investment models to enter the SFR and BTR space, such as acquiring existing portfolios, aggregating scattered site assets, and constructing ground-up, fully amenitized communities.

Compared to owning just a few single-family homes, portfolios of SFR communities can achieve increased net operating income margins because of economies of scale. The SFR and BTR sector is booming, and with substantial institutional capital sources targeting the market, the trajectory of the asset class is likely to continue trending upwards.

As with any market where institutional capital is increasing, SFR and BTR values are rising, making it more challenging for individual investors to access the asset class. However, individual investors can now also invest in the SFR and BTR space alongside institutional investors through commercial real estate crowdfunding platforms. See ArborCrowd’s SFR Insights for more information.

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