Multifamily rental demand soared in 2021, driven by the resurgence of the U.S. economy and demographic shifts. Single-family rental (SFR) and build-to-rent (BTR) communities in particular have gained enormous attention as these properties provide an appealing option to meet the needs of a wide variety of renters.
In the past, people who weren’t ready for homeownership had limited choices if they wanted to live in a single-family house, typically relegated to renting directly from small landlords that offered no amenities and often poor management. However, SFR and BTR communities are allowing all renters to enjoy the perks of suburban living, such as more privacy and space, as well as access to high-quality neighborhoods, without the burden of homeownership.
Today, the SFR and BTR space is growing rapidly and has even attracted homeowning families who have sold their houses, according to The Wall Street Journal. Meanwhile, institutional real estate investors are following the renter demand for SFR and BTR units and have poured more than $30 billion into the space between March 2020 and November 2021.
SFR and BTR Offer the Home Without the Cost of Homeownership
SFR and BTR communities are appealing to renters searching for a more affordable option than buying a home, but that still offers the homeownership experience. Many SFR and BTR residents moved away from expensive markets and relocated to Sun Belt cities, which are comparatively inexpensive, according to GlobeSt. This trend started in 2015, but accelerated during the COVID-19 pandemic as working from home became more prevalent and home prices skyrocketed.
U.S. rental households earned a median income of $45,191 in 2020 compared to U.S. owner household’s median income of $82,210, according to the National Multifamily Housing Council. Many people want to purchase a home but can’t afford to as home prices have climbed to record highs following the COVID-19 pandemic.
Increased desire for more space and privacy were among several key factors that impacted demand for homes. The result is an imbalanced housing sector where supply is limited and demand is high, resulting in bidding wars. Now 45% of newly listed homes are being purchased within merely two weeks of being listed, according to Redfin.
This environment has pushed homeownership out of reach for those who have limited capital for a down payment and closing costs to secure a mortgage loan. Purchasing a home becomes even more difficult when considering the required income for monthly mortgage debt service payments, property taxes, insurance expenses, maintenance and repair costs, and utilities.
Today, renting is more affordable than buying a home almost everywhere in the country, The New York Times indicated based on a recent study.
Millennials Benefit from SFR and BTR
Millennials (currently 25 to 40 years old) are on the cusp of forming families and many are opting for SFR and BTR units instead of the traditional route of homeownership.
Adults under 44 years old make up 54.3% of renter households in the U.S., according to the Pew Research Center. Nearly 70% of millennials say student debt, which has grown to a record $1.73 trillion, is delaying homeownership for them.
Additionally, millennials have a lower rate of homeownership than previous generations. Approximately 42% of millennials owned homes at age 30 compared to 48% for Generation X and 51% for baby boomers when they were the same age, according to Apartment List’s annual millennial homeownership report. The same survey found that in 2020, 18.2% of millennial renters said they plan to rent forever, which increased from 12.3% in 2019.
Record home prices aren’t the only factor affecting millennial homeownership rates. A national housing shortage is also limiting available homes for younger people. In the past, younger people typically began homeownership with a “starter” or “entry-level” home. These homes, defined by Freddie Mac as containing 1,400 or less square feet, made up 34% of new homes built from 1976 to 1979. In 2020, construction of entry-level homes were near a 50-year low and made up approximately 10% of new homes built, according to Freddie Mac.
An estimated 11 million households are expected to be formed in the next decade, most of which will likely be millennials, and with homeownership out of reach for many of them, SFR and BTR is filling the void.
SFR and BTR Fills the Demand for Luxury Amenities, Flexibility and Professional Management
A growing number of renters can afford a home but are choosing to rent SFR and BTR units to enjoy the perks of amenities, flexibility, and professional management. While homeownership certainly has many merits, renting aligns with the preferred lifestyles of these individuals and families.
Some of the key reasons why people choose to rent include:
- Purchasing a house could limit liquidity and add risk.
- Some people prefer to let professionals address maintenance and repairs rather than doing it themselves.
- Buying or selling a home can be a long and complicated process that typically doesn’t allow flexibility if one wants to relocate quickly.
Additionally, renting gives residents access to a variety of amenities they may not have been able to obtain with their own house, such as:
- Fitness centers
- Private theaters
- Event spaces
- Dog runs
These benefits have led some experts believe that many SFR and BTR renters may continue to forgo homeownership.
Ultimately, single-family rentals and build-to-rent communities have proven to be attractive for all renters as they provide a more affordable, flexible, and amenity-packed housing option than homeownership. Renters of all kinds may continue to fuel the growth of the asset class, making it a very appealing space for real estate investment.