It’s a fact that everyone needs a place to live, which is a major reason why multifamily properties have been more resilient than other real estate asset classes in past downturns. And as part of the multifamily industry, single-family rentals (SFR) and build-to-rent (BTR) communities are poised to benefit from this basic necessity.
What Does it Mean to Be a Resilient Asset Class?
Resilient real estate asset classes are those that maintain strong user demand even in times of economic disruption or market volatility. Investors seek resilient assets because they may reduce risk and help stabilize their portfolios, allowing them to weather down markets and achieve steady long-term growth. Multifamily real estate has been a prime example of a resilient asset class. Despite the pandemic-driven economic uncertainty, multifamily rents and occupancy levels have on average remained steady or increased while other asset classes, such as retail or office, have seen the opposite occur.
Within the multifamily real estate space, SFR and BTR in particular appear to be the beneficiaries of renter demand.
Why Renters Are Choosing Single-Family Rentals and Build-to-Rent Communities
A prime reason SFRs and BTRs are surging in demand is due to demographic shifts.
An overwhelming majority of millennials (of which there are 72.1 million people) who don’t own homes want to become homeowners, but are not able to afford it. According to a Lendedu survey in January, 89% of millennials who did not already own a home want to become a homeowner at some point in their lives. However, with median home prices currently at all-time highs and student debt plaguing this group, homeownership is still many years away for most of them.
As a result, many millennials are turning to renting SFRs as a first step to homeownership. It provides the feeling of owning a home, but with the flexibility that can’t be found as a homeowner: the tenant can leave at the end of their lease term, and is not responsible for large maintenance costs. Ultimately, renting an SFR grants the tenant most of the pros of being a homeowner without the illiquidity and high costs.
Single-Family Rentals and Build-to-Rent Communities Resilience During the Great Recession
Although it’s impossible to know for certain how investments in SFR and BTR will perform in a future recession, we can make meaningful observations based on the asset class’s performance during the Great Recession.
Single-family rental properties have existed alongside owner-occupied homes for decades. Institutional investors mostly ignored the asset class as it was previously seen as inefficient and logistically challenging. These investors instead focused on other multifamily property types, such as high-rise buildings and garden-style apartments.
During the Great Recession, however, some investors noticed the price dislocation offered by a wave of foreclosures in the single-family housing market. Pioneering institutional SFR investors, such as Invitation Homes and American Homes 4 Rent, began purchasing these properties to rent them with the ultimate goal of selling them for a profit after the economy recovered.
What they discovered in the process was the strength of the SFR market. While the recession forced many families to lose their homes, many of those same families rented out SFRs as a transition from homeownership to rentership. Single-family rental units grew a remarkable 36% from 2005 to 2017, far outpacing the 4.7% growth rate of owner-occupied, single-family homes during that time.
Additionally, the vacancy rate for SFRs remained stable during the Great Recession, and it was lower than the vacancy rate for all rental types during that time. In the first quarter of 2006, the SFR vacancy rate was just under 10%, and it stayed under that mark during the length of 2008 and 2009, according to a report from the Joint Center for Housing Studies of Harvard University.
Single-Family Rentals’ Outstanding Performance During the COVID-19 Pandemic
Multiple factors contributed to the strength of SFR and BTR during the COVID-19 pandemic.
Many people sought more space for remote learning and working and SFR or BTR communities were more flexible and affordable options compared to buying a new home. Additionally, people wanted more privacy for social distancing to avoid contracting and spreading the virus. Ultimately, there was a large migration away from dense urban cores to smaller cities and suburbs where SFRs and BTRs are more likely to be found.
Due to the surge in demand, the SFR space had very strong fundamentals during the pandemic.
SFR occupancy averaged 95.3% in the second quarter of 2021, which matched the second quarter of 2020 when COVID-19 cases first exploded around the country, according to Arbor Realty Trust’s Q2 Single-Family Rental Trends Investment Report. This level of occupancy is a generational high as SFR occupancy has been rising steadily since the early 2010s when it was under 91%.
The report also indicated that rent growth has been impressive. From May 2020 to April 2021, annualized rent growth has averaged 8.1% for “vacant-to-occupied” SFR units, more than double the historical average of 3.3%. And annualized rent growth for lease renewals was 5.2% in April, a record high.
Institutional investors have many reasons to invest in single-family rentals and build-to-rent communities, which show no indications of slowing down. In fact, the continued investment in the space by institutions is expected to help meet the need and demand for purpose-built rental homes and propel the space even further. SFRs and BTRs are well positioned for continued growth, helping the multifamily space continue its track record of resiliency throughout turbulent and uncertain times.