Single-Family Rental

Taking Stock: Single-Family Rental is Here to Stay

May 13, 2014

Single-family homes now comprise 35% of all rentals and 11% of all households.

Source: U.S. Census Bureau; John Burns Real Estate Consulting estimates

What’s driving demand?

From 2005 to 2012, single-family rental homes grew 1.7% per year, primarily due to:

  • Foreclosures and short sales. In judicial foreclosure states such as Florida, Illinois, and New York, there are many more foreclosures to come.
  • Affordability. Many households cannot afford to purchase a home due to bad credit, loan documentation issues, high levels of debt, and home prices now being out of reach.
  • Confidence. Many households do not yet have the confidence to purchase, knowing that they could lose their job or be required to relocate.

Two misconceptions

A common misunderstanding is the magnitude of institutional investor purchases. Institutional investors comprise less than 1% of the industry. Today, this market remains highly fragmented and largely dominated by local mom-and-pop operators who have boots-on-the-ground knowledge and will continue to be the ones collecting monthly rent checks. Another misconception is the fear of local real estate markets suffering large price declines when investors decide to liquidate their investments. While we acknowledge that the next downturn is likely to be exacerbated by investor selling, consider the following:

  • Capex. Large amounts of capital expenditures are being directed toward improving the properties as well as developing property management software. There is a new industry of property managers emerging with cutting-edge technology available to better optimize operations for those with 1 or 40,000 rental homes. These investments would not be made by “flippers.”
  • New trade group. Colony American Homes, Invitation Homes, American Homes 4 Rent, and Starwood Waypoint Residential Trust recently formed the industry group National Rental Home Council to advocate on behalf of the single-family rental industry.
  • Debt availability. The securitized debt market has opened up to large single-family operators. Smaller operators are seeing lending opportunities become more abundant as well. Lower cost capital is now becoming available to this industry.

Looking Forward

Investors both large and small have taken a significant ownership position in the housing stock of this country. We anticipate further consolidation in the single-family housing market as smaller regional operators with local knowledge are acquired by larger national operators. The economies of scale gained from these acquisitions will begin to evolve, and cost savings in the form of lower operating expenses and competitive rents will benefit both landlord and renters, creating a sustainable asset class for years to come.

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