Single Family Rentals, or SFRs, are experiencing a "Gold Rush" moment. We'll break down the thesis in this article.
Since the pandemic began, over $20B of equity has been raised by institutions and funds to invest into the SFR space - Blackrock, Invitation Homes, JLL, and many more.
One of the main reasons why asset managers like Blackrock are buying these homes is that the SFR cap rates have split off from the actual home valuations. Large portfolios of rentable SFRs are valued higher than the retail valuations of the homes themselves. Funds see this as a solid investment to park capital and raise cheap debt. Additionally, the economics are evolving.
In terms of supply and demand dynamics, the SFR space is quite attractive. Single family home construction has been on the decline for decades. The inventory of this class of real estate has decreased nearly 75% since the Global Financial Crisis. In 2007, there were close to 4 million homes and now there's only 1 million in 2021. Months’ Supply of Houses is currently at around 6 months, which is in line with the historical average, but not enough to meet the growing demand.
Homebuilder bankruptcies after the 2007-2008 financial crisis created the effects we're seeing now, with additional municipal restrictions blocking SFR construction over the past decade in various metro areas.
All of this has led to a severely undersupplied SFR stock relative to new household formations, i.e millennials moving out of apartments into single-family homes.
The demand side of the equation shows you the full picture. Millennials, those born between 1981 and 1996, recently surpassed Baby Boomers as the biggest demographic in the US. These people want to buy homes, but there are not enough to go around.
Millennials are the same demo that drove the multifamily housing asset class into a boom this past decade. This cohort is maturing and in need of more space, namely 3 and 4 bedroom homes. As coliving metrics will show you, this generation is delaying family formation by a few years, which adds more variables to the mix. Regardless of if they're buying or renting, this demographic is itching for their share of the pie, i.e. single family homes.
Given less than 10% of all multifamily unit stock represents 3 bedroom apartments, single-family rental homes make logical sense. Add to this the increasing prices of homes, increased inclination to rent across demographics (ages from 20-60s all renting at higher rates than normal), and you've got a swarm of demand.
Additionally, the revenue of the SFR asset class is too big to ignore, and according to Green Street, will outperform most property sectors over the next 5 years. This is seen through the top 2 SFR REITs, Invitation Homes and American Homes 4 Rent, who are experiencing rent growth between close to 5% in 2021.
Overall, SFRs have the lowest vacancy rates (compared to multifamily) since 1984 due to persistent demand and continued undersupply. SFR rent growth has historically been more stable across economic cycles relative to multifamily. Plus, the SFR asset class is dominated primarily by non-institutional, mom-&-pops with portfolios of less than 50 properties.
Out of the 16M single family homes (with a total addressable market of nearly $4T), less than 5% of the homes are owned by institutions. Meanwhile, 55% of the multifamily market is institutionally-owned. Invitation Homes, as of this writing, is the largest SFR holder and owns 80,000 homes.
Candidly, we are still very much in the early innings of institutionalizing the SFR class.
There are clear reasons why single family rentals are the hottest asset class of 2022, and perhaps the rest of the decade.
Finally, its important to note that almost all of the institutional activity in the SFR space is focused on the "Sun Belt". Renters have "brain-drained" from the larger cities and fled post-pandemic to these places, and that's where you'll see SFRs dominating headlines (states like NC, GA, FL, TX, AZ, TN). It's also where Alcove operates.
At the end of the day, land pricing is key to making the SFR business model work for investors. For SFR investing to be viable, prices will have to support rental yields of around 10% so that one could potentially get to a stabilized NOI yield of around 6%. Not an easy feat in many frothy markets.
Because land costs in the Northeast and West Coast markets are so high, rental yields like this are almost impossible to capture. We'll likely see the "Sun Belt" continue to be a battleground among institutions (even public companies like Zillow and Opendoor), and individuals.
To succinctly summarize why single family rentals are a solid investment:
Valuations will remain high with capital flowing in
Strong economics of high demand, low supply of homes
Better returns due to higher occupancy and more stable NOI
In conclusion, these trends will continue to evolve over the next few years as more millennials age into this type of asset - whether through the means of renting or buying.
If you're an investor or SFR holder, it might be time to look at coliving as a high-yield-generating alternative. The economics are sound and Alcove makes it easy to build a portfolio through our coliving platform.
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