Single-family rentals (SFR) have gained enormous attention in recent years, culminating in an explosion of demand during the COVID-19 pandemic. The asset class experienced double-digit rent growth year-over-year in October 2021 that tripled the growth rate of the previous year, according to a recent report by CoreLogic, and SFRs had an average occupancy rate of 95%, as indicated by Arbor Realty Trust’s Q3 2021 Single-Family Rental Investment Trends report.
The strong demand for SFRs is being fueled by record home prices, a rise in domestic migration from urban centers to the suburbs, the work-from-home movement, and an aging millennial population that is starting families.
Institutional real estate firms have followed this demand and deployed over $30 billion into the industry in the 21 months ending in November 2021, according to John Burns Real Estate Consulting. These institutional real estate investments have been made in the SFR market in a multitude of ways, including purchasing individual homes in various locations, referred to as scattered-site portfolios, and acquiring existing rental home communities that were build-to-rent (BTR). More and more institutions are also developing ground-up BTR communities to meet the high demand for units across the country.
The History and Evolution of Institutional SFR Scattered-Site and BTR Investments
SFR units have existed alongside owner-occupied single-family homes for many decades before institutional investors joined the market. Typically, “mom-and-pop” investors owned and self-managed individual or small scattered-site SFR portfolios in various markets throughout the country, while institutional real estate investors traditionally focused on other multifamily property types, such as garden-style, and mid- and high-rise apartment buildings.
The Great Recession caused a wave of foreclosures of owner-occupied, single-family homes that created an opportunity for pioneering institutional SFR investors. They purchased discounted individual homes in neighborhoods around the country with the intent to rent out the properties in the short-term and sell them when the economy recovered. In the process, they discovered that SFRs were very viable and resilient investments, and there was ample opportunity for growth as the sector had minimal institutional competition.
As the nation recovered from the initial impacts of the Great Recession, the scattered-site model gained attention from more institutional investors and lenders. Technological advances, such as online rental screening tools and mobile apps for maintenance requests, helped streamline property operations, allowing real estate companies to scale and acquire portfolios large enough to be worth their efforts. While investment activity increased for scattered-site portfolios, more institutional investors began investing in existing SFR and BTR communities — anticipating future demand from demographic shifts.
With increased equity and financing sources, and high demand from residents, the SFR market’s liquidity rose rapidly and institutional SFR transactions sharply increased. The pandemic accelerated demographic trends in favor of SFR, further bolstering the market. In September 2021, 26.8% of all single-family home purchases were made by investors as opposed to actual home occupants, setting a new peak from 24.3% in June, according to CoreLogic.
How the BTR Model of Institutional SFR Investing Differs
A BTR community is a contiguous portfolio of homes built specifically as rentals. BTR communities tend to have operational efficiencies, such as an on-site property manager that can make repairs quickly. Additionally, economies of scale can be achieved through building a bulk of similarly constructed homes with comparable materials and appliances.
The units are also typically built with sturdier finishes geared towards tenants, which can result in lower maintenance costs over time. Moreover, unlike an apartment building, individual BTR units can be completed and leased in phases, potentially reducing the risk of the overall development.
New BTR communities are more likely to be completed in metro areas that have more developable and affordable land, given they are ground-up construction. Furthermore, BTR communities are generally developed in markets that have high demand for housing units as they add new inventory to the total housing stock of a market instead of repurposing existing homes.
While BTR units still make up a small portion of new single-family homes, the properties have been on an upward trend in recent years and early Census data points to another strong year in 2021. By the third quarter of 2021, the 12-month total of BTR starts was 86,000 units, surpassing the totals in 2020 and 2019 of 78,000 and 69,000 units, respectively, according to a recent Arbor and Chandan Economics study. The space still has tremendous untapped potential as institutional investors have just begun to explore the BTR asset class.