Single-family rental projects on the rise: Evolving demographics and preferences creating new opportunities for investors

By: Byron Plant, Senior Vice President (article originally published in Real Assets Advisor)

As consumer preferences shift to embrace renting over homeownership, the purpose-built single-family residential (SFR) sector represents a potentially attractive investment opportunity. The need for rental properties is steadily growing, with 65 percent of new households electing to rent rather than buy. For residents, these properties combine the no-fuss maintenance of apartment living with the amenities of a single-family home. For investors seeking to participate in the residential market and looking to avoid the crowded multifamily sector, SFR communities offer attractive exit conditions, operational efficiency and consumer demand.

AN ASSET IN HIGH DEMAND

As the needs of various demographics evolve, many consumers require specific features that SFRs can meet. These properties can serve as an appealing option for all generations, from millennials who often need to rent, to baby boomers nearing retirement and looking to downsize.

Millennials, often weighed down by debt loads, tend to prefer the ease and affordability of renting. However, as they begin to form families of their own, they also desire the privacy, space and comfort of homeownership. SFR rentals cater to these needs, offering room to raise a family and a sense of belonging not often found in multifamily units. Recent studies indicate that 74 percent of millennials are moving to rentals, and they account for half of U.S. households with children. For these budding families, SFR rental communities provide the amenities and interpersonal connections of a close-knit neighborhood.

On the other hand, as boomers exit the workforce, many members of this generation are actively seeking to curtail expenses, often by selling their residences and moving into rental properties. A survey by the Federal Home Loan Mortgage Corp. of nearly 6,000 individuals age 55 and older found an estimated 6 million homeowners, and nearly as many renters, prefer to move again and rent at some point in their lives. This transition to renting offers older generations more flexibility without eliminating the comforts of a standalone home to which they have grown accustomed. A community setting also provides the added benefits of accessibility and “walkability” as this generation enjoys their golden years.

Additionally, as members of Generation Z (currently ages 5 to 25) begin to branch out from their parents and seek places to live, the potential market for new SFR rental options will expand.

KEY DIFFERENTIATORS

Investors can find several possible benefits to the development strategy behind SFR communities. Grouping SFR rental properties together in communities allows for increased efficiency in development, management and maintenance. Close proximity between properties and placement in advantageous areas means that repairs, construction and management can be diligently and seamlessly overseen to scale.

Ground-up development can be daunting and carries significant risk. However, given the strength of the demographic and economic drivers, a prospective investor can potentially realize returns that justify this development strategy. Yields for SFR rentals are expected to profile similarly to multifamily developments. SFRs also include potentially lower vacancy risk, based on the enduring popularity of traditional single-family homes among U.S. consumers. Long-term tenants are more inclined to treat the homes with better care and continue to renew their leases.

SFR communities also offer exit-strategy flexibility at the end of the investment timeline. Multifamily typically is sold as an entire complex. SFR communities can be sold either in their entirety, or as individual homes or sub-portfolios of homes. This added flexibility is a significant competitive advantage over multifamily apartment complexes and traditional single-family residential homes. SFRs are, functionally, single-family homes that are professionally and uniformly maintained, rather than a basket of homes maintained to varying standards.

THE TIME IS OPPORTUNE

Built-to-rent SFR communities offer investors the potential to realize attractive growth, income and portfolio diversification. While the market for multifamily rentals is increasingly crowded, the SFR space seems in the beginning stages of its trajectory, making now a potentially opportune time to consider investing.