The rate of new single-family units purposely built-for-rent has doubled over the last 10 years. Our research and consulting activity suggest that investment interest in the sector is rising and the percent of new homes built-for-rent will likely increase in the future. Our Advisory team has been very active on single-family rental (SFR) deals prompting our Senior Managing Principal, Tim Sullivan
, to sit down with our Managing Director, Steve LaTerra
, to discuss trends in the space.
Steve, we have worked on a wide range of SFR projects. Can you describe the types?
Sure. There are two primary types of SFR communities:
The former tend to be larger, offer more bedrooms, and have attached garages. These generally address the needs of young families.
So if both types offer something compelling to the younger generation, should our readers view SFRs as an alternative to entry-level housing?
The detached apartments tend to be smaller and target Millennials and empty nesters. In this case, the renters are opting out of the traditional vertical multifamily living environment but appreciate the convenience of a professionally managed community.
Yes, they are a desirable alternative to entry-level homes in increasingly expensive suburban neighborhoods. Our research indicates that these renters prefer the lower density of a single-family detached rental unit and they are willing to accept longer commutes than they would for an apartment.
The SFR business isn't just to build it, sell, it, and move on. There's a longer-term commitment. Many of our homebuilding clients are paying attention to this space. Can all homebuilders compete effectively here?
Yes and no. SFR communities built on platted lots are more similar to homes built-for-sale than detached apartments, but both rental types of communities are operating businesses rather than self-liquidating assets. If a builder isn’t prepared to run the operations, they probably shouldn’t build homes for rent as a business.
Agree. What about master planned community developers?
Most master planned community developers in Phoenix have begun considering SFR as a replacement for entry-level given elevated land costs. The thesis is that once a tenant establishes himself/herself in a geography (shopping area, school district, etc.), they are far more likely to remain in the area and buy a home when they are ready. This has played out in Phoenix with early movers such as BB Living, NexMetro, and Christopher Todd.
What are the most important factors to consider when analyzing a ground-up SFR community?
First, land cost. It’s the greatest lever in the calculus of a proforma. Rents vary less across submarkets than land costs. Next, job growth, incomes, housing stock, and competition. Even though SFR communities can command rent premiums of 25% over traditional garden style apartments, the product shouldn’t be constructed everywhere.
Land really is the key. With that in mind, do you think that SFR communities are viable in most geographies?
No, we have not seen the concept underwrite in the high-priced coastal markets as a general rule. Even within markets that have accepted the concept like Phoenix, Denver, and Dallas, our research shows that the product doesn’t work in every submarket.
Our research indicates this product is a permanent part of the suburban fabric. What are the key factors to support this?
There are a few reasons why SFR are here to stay. First, the market has embraced them as a desirable housing product and the old stigma of renting has waned. Second, housing affordability concerns are not easing. Third, the increasing cost of homeownership is keeping renters renting longer and occupancy levels for SFR communities are high.