Single-Family Rental & Build-to-Rent Numbers Continue to Impress

By The ArborCrowd Team
Sep 15, 2022

The single-family rental (SFR) and build-to-rent (BTR) market continues to show strong signs of growth as more institutional investment capital enters the space.

In just the last year, institutional investors have committed over $60 billion for single-family rental homes, according to Yardi Matrix’s July 2022 report on the sector. Despite the strong investment, ample opportunity still exists as only 5% of the SFR market is owned by institutional investors, according to information by MetLife Investment Management (MIM) cited in Yardi’s report. MIM estimated that institutional investors will continue to push the growth of the space and own more than 40% of the SFR market by 2030.

SFT/BTR is attractive to investors because tenant demand is strong as housing prices remain near record highs and mortgage rates have increased rapidly, keeping potential homebuyers on the sidelines. Despite being unable to purchase homes, people still desire to live in them, such as millennials who are increasingly forming families and need more space, as well as those who have shifted to remote working.

Institutional Investors Change Focus to BTR

Record high prices for existing single-family properties in the market is making it challenging for institutional investors to identify deals with strong upside potential. Therefore, investors are shifting their focus to build-to-rent, Yardi indicated.

Following the Great Recession, institutional investors purchased scattered-site portfolios at deep discounts. Scattered-site deals involve purchasing existing noncontiguous single-family homes.

Prior to that time, institutional investors typically only participated in traditional apartment deals for multifamily exposure. They intended to sell the homes for a profit after the economy recovered and prices normalized. However, rather than keeping these homes vacant and waiting for the market recover, these investors rented the homes to tenants in the interim. The rental demand for the homes were strong, proving the viability of the single-family rental product for institutional investment.

While the institutional SFR market was born out of the scattered-site portfolio strategy, the BTR strategy — ground up single-family rental communities — is now growing. There are more than 25,000 total units currently under construction in Yardi’s database of SFR projects, which only includes projects with at least 50 units. This pace is expected to greatly surpass last year’s record deliveries of 7,700 BTR units.

Two-thirds of the BTR units under construction in Yardi’s database are within secondary markets, as opposed to just a tiny fraction (626 units) being in gateway markets. This is due to:

  • Higher construction and labor costs of gateway markets
  • Limited availability of land at a reasonable price
  • Entitlement process in gateway markets can be “protracted”

According to Yardi, the top markets for BTR development are concentrated within the Sun Belt region: Phoenix (5,200 units), Dallas-Fort Worth (2,200 units), Charlotte (1,400 units), Houston (1,100 units), and Tampa (1,000 units). This region has less density, a milder climate, and more affordable land, making it more conducive to SFR.

Tenant demand for SFR/BTR is expected to remain strong as the housing market corrects due to the combination of high prices and rising mortgage rates. While the price of for-sale homes decreased 0.77% from June to July, nationwide average monthly asking rents for SFR rose 11.2% to a record high $2,092 in July, according to Yardi. Additionally, vacancy rates were 5.1% in Q2 2022 — near its lowest level in more than two decades, U.S. Census Bureau data indicated. The future appears bright for the BTR asset class as institutional investors focus on it to grow their single-family rental portfolios to meet the incredible tenant demand.