Single-Family Residential RentalsMay 27, 2020 Educational
A New Trend In Commercial Real Estate
Single-family residential (“SFR”) rentals are communities of single-family homes built to rent rather than to own. These homes seek to combine the convenience and flexibility of apartment-style living with the amenities and space of a single-family residential home.
SFR rental communities are an ‘opportunistic’ investment. Opportunistic investments can cover a range of potential projects but often focus on ground-up development. Ground-up developments take time to entitle, plan, and begin construction. As a result, these deals often have a long hold time, typically five years or longer. The nature of the project and long hold time exposes the Sponsor to project risk, leverage risk, political risk, and economic risk. To compensate investors for bearing the higher risk and longer hold time, annualized returns can be 20% or higher upon exit.
Virtua estimates that demand for rental homes is expected to outpace supply by 1.1 million units through 2023. The nature of economic recovery has generally favored renting over owning a home. Home values have steadily marched upward since 2011, eclipsing pre-recession highs by January 2017. At the same time, lending standards have grown more conservative, making homeownership less affordable. Historically, household formation is correlated with low unemployment, which can further drive up home prices.