Research Report Category: Single-Family Rental Investment Trends

State of the Market

With wind in its sails, the single-family rental (SFR) sector continued to gain positive momentum in the first quarter of 2022. With the costs of homeownership rising alongside mortgage rates, SFR’s growing role as the new U.S. starter home continues to cement.

The sector’s decade-long trend of institutionalization has accelerated over the past year. According to John Burns Real Estate Consulting, more than $50 billion of institutional capital is currently moving through the SFR sector. In the CMBS market, SFR issuance reached a record $16.6 billion in 2021 — nearly doubling 2020’s total of $8.9 billion, according to Finsight. In the first quarter of 2022, SFR CMBS issuance reached $3.7 billion, rising 124% above the total observed in the first quarter of 2021 (Chart 1).

The demand for single-family housing in the U.S. increased throughout the pandemic, while access to homeownership did not. With conventional 30-year mortgage rates reaching above 5% in April, the monthly debt servicing costs on new home loans are nearly twice what they were in early 2020 Further, according to the Mortgage Bankers Association, lending standards are about 30% tighter today than they were in early 2020. Additionally, the Federal Reserve’s ongoing tightening cycle, which is expected to cool many parts of the economy, will increase mortgage borrowing costs — a development that will push some would-be buyers into the rental market. On balance, the SFR sector is well-positioned to see continued growth in 2022 as cyclical forces play in its favor, and underlying demand for single-family housing remains strong.

Performance Metrics

Originations

According to a Chandan Economics analysis of Fannie Mae data, a lending source for mostly non-institutional borrowers, refinancing, instead of acquiring, has accounted for the significant majority of recent originations to single-family investors. In 2020, refinancing activity accounted for 71.0% of tracked originations (Chart 2). In 2021, the refinancing share dropped slightly to 69.9%. While the change from 2020 to 2021 was marginal, on a quarter-to-quarter basis, the shifts were anything but. The refinancing share of lending activity declined every quarter throughout the year, reaching a high of 77.7% in the first quarter and sinking all the way to 60.1% in the fourth. Notably, term/rate refinancings declined by 4.4 percentage points in 2021, and 26.8 percentage points between the first and fourth quarters — a sign that investors were locking into low-interest rates early last year ahead of the Federal Reserve’s

monetary tightening.

Occupancy

As measured by the U.S. Census Bureau, occupancy rates across all SFRs averaged 94.9% in the first quarter of 2022, rising by 10 basis points (bps) from the fourth quarter of 2021 (Chart 3). The first-quarter reading brings the SFR occupancy rate within 40 bps of its generational high — indicating that the sector is operating at or near full potential occupancy.

Rent Growth

Single-family rent growth remained robust entering 2022, even as the pace of increase on newly signed leases has started to slow. According to DBRS Morningstar, vacant-to-occupied (V2O) annual rent growth accelerated to an unprecedented high of 17.1% in July 2021 in what can be best described as a recalibration of market pricing (Chart 4). Since then, V2O rent growth slowed in five of six months, reaching 11.5% in the latest reading. Even as momentum has slowed, the current pace of rent increases remains well above the pre-pandemic pattern. Between 2015 and 2019, V2O rent growth averaged 3.3% — a baseline that the January 2022 data point outperforms by a weighty 816 bps.

For lease renewals, annual rent growth hit another all-time high in January 2022, reaching 7.8%. Between 2015 and 2019, SFR renewal rent growth consistently ranged between 3.3% and 5.0%. Since February 2021, SFR renewal rent growth has topped the 5.0% mark in 12 consecutive months of observations.

Surging lease renewal rent growth is best categorized as a market response to the growth in V2O prices. When setting rents for existing tenants, many landlords will consider three primary, interconnected criteria:

What the unit could rent for on the open market
Probability of tenant renewal
Anticipated length of vacancy if a tenant does not renew

When a landlord identifies a unit to be underpriced and perceives that it will be rented again quickly in the event of a vacancy, they are more likely to pursue a sizable rent increase on the next lease. With V2O rent growth topping renewal rent growth for 22 consecutive months, lease-over-lease rents should be expected to accelerate over the short term as prices re-establish an equilibrium.

Analyzing rent growth at the market level, unsurprisingly, the Sun Belt has maintained its dominance. According to CoreLogic’s Single-Family Rent Index (SFRI), annual rent growth across the top 20 U.S. metros through February was highest in Miami, Orlando, and Phoenix, climbing by 39.5%, 22.2%, and 18.9%, respectively. All of the tracked Sun Belt metros saw rent growth totals above 10.1% in the year ending February 2022.

Cap Rates

Property-level yields for SFR assets ticked up in the first quarter of 2022, rising by 34 basis points to settle at 5.6% (Chart 5).¹ The first-quarter observation marks the first time that SFR cap rates have risen since the onset of the COVID-19 recession.

While growing cap rates may concern operators, the reason why yields are rising carries much greater importance. The first-quarter rise is attributable to strengthening net operating incomes achieved through higher rents— not a devaluation of assets. Historically, single-family rent growth has lagged inflation by several months. Rent rolls, which take a full year to reset, are currently still adjusting to the bull-run of home prices experienced in 2021. This lagged adjustment is creating an anticipated catch-up period where property incomes are rising more quickly than valuations, causing upward pressure on cap rates.

The yield spread between SFR cap rates and the 10-year Treasury estimates the SFR risk premium. Despite growing SFR yields in the first quarter of 2022, this risk spread narrowed as the yield on Treasurys rose by a more significant 42 bps. In total, the risk premium sank 8 bps from the previous quarter to land at 3.7% — the lowest level since late 2018. Moreover, the risk premium is down by a weighty 70 bps from one year ago (Chart 6).

The cap rate spread between SFR assets and multifamily properties widened by 35 bps in the first quarter of 2022, settling at 84 bps — within one basis point of where they were this time last year. Over the past decade, SFR-multifamily cap rate spreads have narrowed from a high of 496 bps in 2012 to the sub-100 bps levels observed today. Increased liquidity and tech adoption have allowed the SFR sector to operate more efficiently over the past decade, generating a bid-down of its risk premium. Over the long term, some positive yield differential between SFR and multifamily assets remains likely — accounting for the co-location efficiencies and shared physical inputs.

Pricing

According to a Chandan Economics analysis of Fannie Mae securitized mortgages, there are material differences between the average assessed property values on mortgages originated to single-family owner-occupants versus single-family investors. The average underwritten value of a single-family investment property in 2021 averaged $367,926 compared to $405,844 for owner-occupied units (Chart 7).

Between 2004 and 2011, the valuation gap sat in a consistent range of 27.2% to 32.5% (Chart 8). As more investors and capital entered the SFR space, discounted investment units became harder to find and competition for inventory ramped up. The valuation gap fell to an all-time low of 5.4% in 2017 before moderating in the years since. In 2021, the average valuation gap averaged 9.3% — a marginal 16 bps decrease from the 2020 average.

Credit Trends Loan-to-value ratios (LTVs), a measure of credit risk on SFR mortgages, kicked off 2022 by rising 56 bps, landing at 66.1% (Chart 9). After sinking by 328 bps during 2020, LTVs quickly recovered back to pre-pandemic levels by mid-2021. The first-quarter 2022 observation marks the highest LTVs have sat in the sector since first-quarter 2018.

Debt yields, another key measure of credit risk, rose by 33 bps during the first quarter of 2022, to settle at 8.7% (Chart 10). The increase marked the end of a streak of debt yield declines that had stretched to seven-consecutive quarters. The slight increase in debt yields translates to SFR investors securing marginally less debt capital for every dollar of property-level net operating income (NOI). Through the first quarter of 2022, SFR debt declined to $11.45 for every dollar of NOI, a $0.45 decrease from the prior quarter, yet still up by $1.43 from this time last year.

Supply & Demand Conditions

Residential Default Rates

During the 2008 housing crisis, investors with available financing took advantage of the market dislocation, acquiring large portfolios of single-family assets at steep discounts. According to the Federal Deposit Insurance Corporation (FDIC), mortgage default rates peaked at 8.1% in 2012, leading to an abundance of distressed sales and the beginning of the SFR sector as we know it today (Chart 11).

The pandemic had a much different impact on the housing market than the Great Recession. Demand for single-family housing increased, causing prices to rise through the distress. Between growing asset prices and federally directed forbearance, homeowner defaults remained uncommon during the pandemic. Default rates hit a pandemic high of 2.5% in the fourth quarter of 2020 — just 74 bps above its all-time low. As of the fourth quarter of 2021, single-family default rates declined for four consecutive quarters, settling at 2.0%.

Build-to-Rent

Purpose-built SFR properties, known as build-to-rent (BTR) communities, continue to become a defining feature of the SFR sector, especially within the institutional slice of the market.

Based on an analysis of Census Bureau data, between 1975 and the start of the prior recession in 2007, BTRs accounted for a little less than 2.0% of all single-family construction starts (Chart 12). In 2013, BTR’s percentage share of construction starts reached an all-time high of 5.8%, and through the fourth quarter of 2021, the share remained elevated at 4.5%. BTR construction starts totaled 51,000 units through the end of 2021, a 15.9% growth rate from a year earlier and a new all-time high. While these construction totals represent significant market growth, they are also like to be understated.

The reason why the initial BTR estimate may be understated is that the single-family construction starts data does not include units that have been started and sold to SFR operators (build-for-rent or BFR). In a recent Arbor-Chandan analysis, Chandan Economics estimates that the total number of SFR construction starts over the past year may be as high as 90,000 through the fourth quarter of 2021 (Chart 13).

Tracking Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” can be leveraged as a proxy for hotspots of SFR demand. Savannah, GA, was the most popular area where the term was searched during the first quarter of 2022, dethroning another Georgia metro, Macon, which had seen the highest search frequency in the previous period (Table 1).

The Sun Belt continues to be the region driving new SFR demand, with the southeast corner of the country standing as a tightly-packed epicenter. All of the metros in the top 10 are located in just five states: Georgia, Tennessee, South Carolina, Alabama, and North Carolina. Among the reasons why the Sun Belt continues to attract new residents and SFR demand, affordability, lower taxes, and warmer weather all top the list.

Outlook

The SFR sector had a marquee year in 2021. Early indications are that it will continue to post impressive growth totals in 2022 — even as some of the pandemic-related tailwinds are exhausted. According to the John Burns Real Estate Consulting Single-Family Rental Market Index, a diffusion index where a reading above 50 indicates improving conditions, momentum has slowed. The index has declined in two-consecutive quarters through the end of 2021, falling from 84.4 to 71.5. Two of the index’s sub-components, occupancy, and current leasing conditions, have declined for three consecutive quarters. Still, all sub-components and the overall index remained above 50, signaling improving conditions across the board. All told, the immediate outlook for the SFR sector remains firmly positive. According to the Federal Reserve Bank of New York 2022 SCE Housing Survey, just 42% of renters think they will buy a home in the next three years — down from 52% when surveyed last year. The SFR sector is well-positioned to absorb both lifestyle renters and a growing wave of forming families that are priced out of homeownership, creating a dependable bedrock of demand for the year ahead.

For more single-family rental research and insights, visit arbor.com/blog

¹ Unless otherwise noted, the Chandan Economics data covering single-family rental cap rates, loan-to-value ratios, and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Single-Family Rental Investment Trends Report Q4 2021

Q4 2021
Single-Family Rental
Investment Trends
Report

Cap Rates Reach New Lows as Build-to-Rent Construction Accelerates

Key Findings

Cap rates dipped to 5.3% in fourth-quarter 2021 — a new all-time low
Vacant-to-occupied (V2O) annual rent growth remains robust, hitting 13.5% through October
Occupancy rates edge down to 94.8% in the third quarter, just 50 bps off their generational high

Table of Contents

State of the Market

The single-family rental sector (SFR) enjoyed its best year on record in 2021, as demographic and pandemic-related forces combined with growing investment enthusiasm.

The sector’s decade-long trend of institutionalization has accelerated over the past year. According to Finsight, SFR CMBS issuance reached a record $16.6 billion in 2021— nearly doubling 2020’s total of $8.9 billion.

Despite the recent impressive growth, the sector looks ready to continue growing rapidly. According to a recent survey of 3,300 renters by RentCafe, nearly 4-out-5 respondents would consider moving into an SFR community. Further, current housing market conditions will likely mean that the transition into ownership will be increasingly complex over the medium term. Home prices have already surged to new peaks, and 30-year fixed mortgage rates have started to rise, reaching their highest levels since before the pandemic as of January 2022. According to the National Association of Home Builders, the share of prospective home buyers looking to buy a home in the next 12-months has dropped for two consecutive quarters through the end of 2021.

On balance, the demand for single-family housing in the U.S. has only increased throughout the pandemic while access to ownership has not. Single-family rentals have helped to fill the gap, providing accessible housing options in suburban neighborhoods with family-centric amenities. Nationally, the SFR sector remains in growth mode with many supportive tailwinds.

Performance Metrics

Originations
According to a Chandan Economics analysis of Fannie Mae data, a lending source for mostly non-institutional borrowers, refinancing, instead of acquiring, has accounted for the significant majority of recent originations to single-family investors. In 2020, refinancing activity accounted for 71.0% of tracked originations. Through the third quarter of 2021, the refinancing share was even higher, reaching up to 76.7%— its highest percentage on record (Chart 1). As recently as 2018, originations for acquisitions still accounted for most lending activity. However, with borrowing rates falling to new all-time lows in recent years and through the pandemic, investors have seized the opportunity to lock in lower financing rates. Notably, rate-and-term refinancings have accounted for 54.6% of all originations and a weighty 71.2% of refinancings in 2021, a sign that investors are locking into low interest rates ahead of the Federal Reserve’s anticipated monetary tightening.

Occupancy
As measured by the U.S. Census Bureau, occupancy rates across all SFRs averaged 94.8% in the fourth quarter of 2021, dipping by 20 basis points (bps) from the third quarter (Chart 2). The fourth-quarter reading brings the SFR occupancy rate 50 bps off their generational highs, though it still indicates that the sector is operating at or near full potential occupancy.

Rent Growth
Annualized rent growth on vacant-to-occupied (V2O) SFR properties remains robust, though it has started to slow ¹. According to DBRS Morningstar, V2O annual rent growth reached an all-time high of 17.1% in July 2021 before retreating in August and September (Chart 3). Through October 2021, the last month of available data, V2O annual rent growth sits at 13.5%— 359 bps off the July peak but still 670 bps higher than any pre-pandemic reading. The 2021 surge in V2O rents coincides with a historic rise in home property values. According to the S&P/Case-Shiller Home U.S. National Home Price Index, annual home price appreciation reached a high watermark of 19.0% in August.

For lease renewals, annual rent growth hit a record high in September 2021, reaching up to 7.2%. Through October, the latest month of available data, average rents in lease renewals are up by 6.9% from a year earlier. Between 2015 and the onset of the pandemic in 2020, SFR renewal rent growth consistently ranged between 3.3% and 5.0%. Since February 2021, SFR renewal rent growth has topped the 5.0% mark in nine consecutive months of observations.

Unsurprisingly, the Sun Belt has maintained its SFR rent growth dominance over the past year at the metro level. According to CoreLogic’s Single-Family Rent Index (SFRI), annual rent growth across the top 20 U.S. metros through November was highest in Miami, Phoenix, and Las Vegas, climbing by 33%, 19%, and 17%, respectively. According to a recent report by Redfin, the trio of Miami, Phoenix, and Las Vegas account for the three U.S. metros with the highest net inflows of new residents.

¹ Vacant-to-Occupied (V2O) units are single-family properties that were previously vacant and were recently leased by a new renter household. These units tend to adjust more quickly to seasonal and economic factors as they are not contractually tied to a base year rent and are free to adjust to prevailing market rents.

Cap Rates
Property-level yields for SFR assets continued to compress in the fourth quarter of 2021, reflecting that growing investor demand continues to outpace the delivery of new SFR supply. Through the fourth quarter of 2021, SFR cap rates averaged 5.3%, down 21 bps from the previous quarter and down 50 bps from the same time last year (Chart 4) ². The fourth-quarter reading marks the lowest observed cap rates since Chandan Economics began tracking the sector in 2011. Moreover, SFR cap rates have fallen for four consecutive quarters after marginal increases in 2020.

The yield spread between SFR cap rates and the 10-year Treasury estimates the SFR risk premium. This spread narrowed as Treasurys rose and SFR yields fell in the fourth quarter. In total, the risk premium sank 42 bps from the previous quarter to land at 3.7%— the lowest level since early 2019. Moreover, the risk premium is down by a weighty 117 bps from one year ago. The cap rate spread between SFR assets and multifamily properties ticked up by 3 bps in the fourth quarter of 2021, settling at 48 bps. In the prior quarter, the cap rate spread hit an all-time low of 45 bps. The marginal increase in the latest data comes as cap rates for multifamily properties fell more significantly than the decline measured for SFR assets to close the year. Measured from one year earlier, the cap rate spread between the two asset types is down by 33 bps. Over the past decade, SFR/multifamily cap rate spreads have narrowed from a high of 496 bps in 2012 to the current sub-50 bps levels observed today. In addition to capital inflows, tech adoption, namely smart home technologies and property management software, have allowed the sector to achieve critical operating efficiencies, reducing risk.

² Unless otherwise noted, the Chandan Economics data covering single-family rental cap rates, loan-to-value ratios, and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

Pricing
According to a Chandan Economics analysis of Fannie Mae securitized mortgages, there are material differences between the average assessed property values on mortgages originated to single-family owner-occupants versus single-family investors. Through the third quarter of 2021, the average underwritten value of a single-family investment property last year has averaged $367,250 compared to $407,387 for owner-occupied units (Chart 6).

Several likely factors contribute to this valuation gap, one being that many investors are targeting value-add assets rather than paying top dollar for value that already exists. Additionally, investor-owned SFR properties have vacancy, turnover, and management-related expenses that owner-occupied units do not have to account for, contributing to lower values for the rental units. Nevertheless, the gap has narrowed dramatically over the past decade.

Between 2004 and 2011, the valuation gap sat in a consistent range of 27.2% to 32.5% (Chart 7). As more investors and capital entered the SFR space, discounted investment units became harder to find and competition for inventory ramped up. The valuation gap fell to an all-time low of 5.4% in 2017 before moderating in the years since. Through the third quarter of 2021, the average valuation gap this year has sat at 9.9%— a marginal 18 bps increase from the 2020 average.

Credit Trends
Loan-to-value ratios (LTVs), a measure of credit risk on SFR mortgages, ended the year by edging down for the second consecutive quarter, shaving off 17 bps to land at 65.5% (Chart 8). After sinking by 328 bps between the second and fourth quarters of 2020, LTVs quickly recovered back to pre-pandemic levels by mid-2021. Despite recent marginal declines, SFR LTVs remain higher than they were at the onset of the pandemic. The return and stabilization of LTVs to pre-COVID-19 levels are a welcome signal that credit risk appetites have recovered and remain aligned with the sector’s favorable outlook.

Debt yields, another key measure of credit risk, fell by 37 bps between the third and fourth quarters of 2021, settling at 8.4%— the lowest rate on record (Chart 9). The drop in debt yields translates to SFR investors securing more debt capital for every dollar of property-level net operating income (NOI). Through the fourth quarter of 2021, SFR debt increased to $11.89 for every dollar of NOI, a $0.50 increase from the prior quarter and a $2.13 increase from this time last year.

Supply & Demand Conditions

Residential Default Rates
During the 2008 housing crisis, investors with available financing took advantage of the market dislocation, acquiring large portfolios of single-family assets at steep discounts. According to the Federal Deposit Insurance Corporation (FDIC), mortgage default rates peaked at 8.1% in 2012, leading to an abundance of distressed sales and the beginning of the SFR sector as we know it today (Chart 10).

When the pandemic reached the U.S. in 2020, there was concern that there might be a wave of household defaults and a housing crisis on the horizon. However, those fears never materialized. Residential default rates never rose above 2.5% during the pandemic and have now fallen for three consecutive quarters, settling at 2.1% through the third quarter of 2021. The lack of default activity during the pandemic triggered recession is a feature of housing market demand. Unlike during the Great Recession, homeowners who found themselves unable to meet their monthly mortgage payments had the option to sell their assets at favorable valuations. Moreover, federally directed forbearance also limited the scope of housing market distress, giving homeowners flexibility during the worst of the pandemic’s economic pain.

Build-to-Rent

Purpose-built SFR properties, known as build-to-rent (BTR) communities, continue to become a defining feature of the SFR sector, especially within the institutional slice of the market.

Based on an analysis of Census Bureau data, between 1975 and the start of the prior recession in 2007, BTRs accounted for a little less than 2.0% of all single-family construction starts (Chart 11). In 2013, BTR’s percentage share of construction starts reached an all-time high of 5.8%, and through the third quarter of 2021, the share remained elevated at 4.1%. BTR construction starts totaled 47,000 units through the year ending in third-quarter 2021, a 17.5% growth rate from a year earlier and a new all-time high— a significant growth rate, but one that appears to be understated.

The reason why the initial BTR estimate may be understated is that the single-family construction starts data do not include units that are started and sold to SFR operators (build-for-rent or BFR). In a recent Arbor-Chandan analysis, Chandan Economics estimates that the total number of SFR construction starts over the past year may be as high as 86,000 through third-quarter 2021 (Chart 12).

Tracking Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” is leveraged as a proxy for hotspots of SFR demand. Macon, GA, was the most popular area where the term was searched during the fourth quarter of 2021, dethroning Columbus, GA, which had seen the highest search frequency in the previous period (Table 1).

The Sun Belt continues to be the U.S. epicenter for SFR demand. All of the top 10 markets searched for in the fourth quarter of 2021 are in the Sun Belt. Moreover, all ten are in the Census Bureau’s South region, which saw its resident population grow by 0.65% in 2021— 60 bps better than the Western Census region, which was the only other area of the country to see population growth last year. Among the reasons why the Sun Belt continues to attract new residents and SFR demand, affordability, lower taxes, and warmer weather all top the list.

Outlook

The SFR sector remains firmly in its honeymoon as a newly minted institutional asset class. Even as investment activity has surged, distress remains limited, indicating that growing enthusiasm has not led to widespread undue risk-taking. After the levels of rent growth measured in 2021, some declining pricing momentum should be expected, and evidence suggests that a reversion to more “normal” levels of robust rent growth is already underway. All told, the SFR sector continues to be an attractive option for both lifestyle renters as well as forming families that lack the means to transition into affordable homeownership. SFR has emerged as a vital option in the U.S. housing stock, and with the cost of homeownership set to rise, demand for single-family rental inventory is poised to grow in the years ahead.

For more single-family rental research and insights, visit arbor.com/blog

Single-Family Rental Investment Trends Report Q3 2021

Q3 2021
Single-Family Rental
Investment Trends
Report

Cap Rates Reach New Lows as Rents Continue to Soar

Key Findings

Cap rates dipped to 5.5% in third-quarter 2021, hitting a new all-time low
Vacant-to-occupied (V2O) rent growth reached a record high of 17.1% in July
Occupancy rates edged down to 95.0% in the third quarter, just 30 basis points off their generational high

Table of Contents

State of the Market

The single-family rental (SFR) sector performed well through the third quarter of 2021, with most indicators reflecting a healthy inflow of investment capital and tenant demand.

Heading into the pandemic, the sector was already rapidly professionalizing, leading to a more efficient management process and allowing institutional managers to scale operations. Further, the SFR product type continues to satisfy a significant market need. Would-be first-time homebuyers are often attracted to single-family rentals, as they offer access to suburban single-family homes without the need to make a sizable down payment. According to a Realtor.com analysis, the available supply of U.S. starter homes is less than half of what it was five years ago.

Today, the SFR market is firing on all cylinders. More than $30 billion of institutional capital has been allocated for SFR (including development) since the beginning of 2020, as record-setting rent growth continues to attract new investors to the sector. Many signs point to continued growth for the SFR market going forward.

Performance Metrics

Originations
According to a Chandan Economics analysis of Fannie Mae data, refinancing rather than acquiring has accounted for the majority of recent originations to single-family investors. In 2020, refinancing activity accounted for 71.0% of tracked originations. Through the second quarter of 2021, the refinancing share was even higher, reaching up to 75.9% (Chart 1).

As recently as 2018, originations for the purpose of acquisitions still accounted for most lending activity. However, with borrowing rates falling to new all-time lows in recent years and through the pandemic, investors have seized the opportunity to lock in lower financing rates. More than two-thirds of recent refinancing originations were rate-and-term refinancings.

Occupancy
As measured by the U.S. Census Bureau, occupancy rates across all SFRs averaged 95.0% in the third quarter of 2021, dipping by 30 basis points (bps) from the second quarter (Chart 2). The third-quarter reading brings the SFR occupancy rate just off its generational high, but the sector is still operating at or near full occupancy.

Rent Growth
Annualized rent growth on vacant-to-occupied (V2O) SFR properties continues to reach new highs.¹ According to DBRS Morningstar, V2O annual rent growth was up to 17.1% through July 2021. Moreover, V2O rent growth hit a new all-time high in each of the last seven months of data available (Chart 3). V2O rent growth has been surging since second-quarter 2020, as suburban migration has coincided with a tight housing market, placing upward pressure on rents.

¹ Vacant-to-occupied (V20) units are single-family properties that were previously vacant and were recently leased by a new renter household. These units tend to adjust more quickly to seasonal and economic factors as they are not contractually tied to a base year rent and are free to adjust to prevailing market rents.

For lease renewals, rent growth reached a record 6.9% annualized rate in July, the latest month of available data. Between 2015 and the onset of the pandemic in 2020, SFR renewal rent growth consistently ranged between 3.3% and 5.0%. Since February of this year, SFR renewal rent growth topped the 5.0% mark in six consecutive months of observations.

At the metro level, the Sun Belt has dominated SFR rent growth over the past year. According to CoreLogic’s Single Family Rent Index (SFRI), annual rent growth across the top 20 U.S. metros through August was highest in Miami, Phoenix and Las Vegas, climbing by 21.4%, 19.2% and 15.4%, respectively. These metros also have seen strong performance in their multifamily sectors. On the other end of the SFR rent growth spectrum are Chicago, Boston and Philadelphia, which saw annual rent growth rates over the same period totaling just 1.4%, 1.5%, and 3.4%, respectively.

Cap Rates
Property-level yields for SFR assets continued to compress in the third quarter of 2021, reflecting an abundance of capital entering the sector, staunch investor demand and solid asset price growth. As a result, through the third quarter of 2021, SFR cap rates averaged 5.5%, down 23 bps from the previous quarter and 77 bps from the same time last year (Chart 4). The third-quarter reading marks the lowest observed cap rates since Chandan Economics began tracking the sector in 2011.²

² Unless otherwise noted, the Chandan Economics data covering single-family rental cap rates, loan-to-value ratios and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

The yield spread between SFR cap rates and the 10-year Treasury offers an estimate of the SFR risk premium. In the third quarter, this spread inched up by 4 bps to 4.2%, as Treasurys dipped slightly more than SFR yields. While the risk premium grew to 5.8% amid the financial disruption of last year’s second-quarter shutdown, it has now come back in line with pre-pandemic conditions observed throughout 2019.

The cap rate spread between SFR assets and multifamily properties fell to another all-time low in the third quarter of 2021, declining by 32 bps to settle at just 0.5%. In the past year, the spread has declined by 79 bps. Moreover, it is still less than 10 years ago when SFR cap rates were more than 500 bps higher than multifamily. The spread has narrowed dramatically over the past decade as asset values have climbed, SFRs have taken on a growing role of providing affordable rental housing, and operations have professionalized, even among smaller operators.

According to a Chandan Economics analysis of Fannie Mae securitized mortgages, there are material differences between the average assessed property values on mortgages originated to single-family owner-occupants versus to single-family investors. Through the first half of 2021, the average underwritten value of a single-family investment property was $371,456 compared to $410,196 for owner-occupied units (Chart 6).

Several likely factors contributed to this valuation gap. Many investors are targeting value-add assets rather than paying top dollar for value that already exists. Additionally, investor-owned SFR properties have vacancy, turnover and management-related expenses that owner-occupied units do not have to account for, which could also contribute to lower values for the rental units. Nevertheless, the gap has narrowed dramatically over the past decade.

Between 2004 and 2011, the valuation gap sat in a consistent range of 27.2% to 32.5% (Chart 7). As more investors and capital entered the SFR space, discounted investment units became harder to find and competition for inventory ramped up. The valuation gap fell to an all-time low of 5.4% in 2017, before moderating in the years since. Through the second quarter of 2021, the average valuation gap this year has sat at 9.4%.

Credit Trends
Loan-to-value ratios (LTVs), a measure of credit risk, on SFR mortgages edged down in the third quarter of 2021 by 7 bps, landing at 65.5% (Chart 8). The marginal decline in the third quarter came after a second-quarter surge of 351 bps — the largest observed one-quarter increase since the Great Financial Crisis. Through the third quarter of 2021, SFR LTVs were 98 bps higher than where they were at the beginning of the pandemic. The return of LTVs to pre-pandemic levels is a welcome signal that credit risk appetites have recovered and remain aligned with the sector’s favorable outlook.

Debt yields, another key measure of credit risk, fell by 46 bps between the second and third quarters of 2021, settling at 8.8% — the lowest rate on record (Chart 9). The drop in debt yields translates to SFR investors securing more debt capital for every dollar of property-level net operating income (NOI). Through the third quarter of 2021, SFR debt increased to $11.39 for every dollar of NOI, a $0.57 increase from the prior quarter and a $1.82 increase from this time last year.

Supply & Demand Conditions

When the pandemic reached the U.S. in 2020, there was concern that there might be a wave of household defaults and a housing crisis on the horizon. However, those fears have yet to materialize. Favorable levels of liquidity, aggressive buyer demand and federally directed forbearance all played a part in limiting widespread distress. Through the second quarter of 2021, the latest quarter of FDIC data availability, mortgage default rates already started to recover, declining 25 bps from the previous quarter to land at 2.2%.

Build-to-Rent

Purpose-built SFR properties, known as build-to-rent communities, continue to become a defining feature of the SFR sector, especially within the institutional slice of the market.

Based on an analysis of Census Bureau data, between 1975 and the start of the prior recession in 2007, SFRs accounted for a little less than 2.0% of all single-family construction starts (Chart 11). In 2013, SFR’s percentage share of construction starts reached an all-time high of 5.8%. Through the second quarter of 2021, the share remained elevated at 3.7%.

SFR construction starts totaled 42,000 units through the year ending in second-quarter 2021, which is down by 1,000 units from the previous period and down by 3,000 from its most recent high in the third quarter of 2018. It is important to note that these data may understate the full stock of incoming SFR supply as it does not include units that are started and sold to SFR operators, which the National Association of Homebuilders estimates could account for another 2% of single-family housing starts.

Tracking Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” is leveraged as a proxy for hotspots of SFR demand. Columbus, GA, was the most popular area where the term was searched during the second quarter of 2021, dethroning Savannah, GA, which had seen the highest search frequency in the previous period (Table 1).

The Sun Belt continues to be the U.S. epicenter for SFR demand. All the top 10 markets searched for in third-quarter 2021 were in the Sun Belt. Moreover, nine of the 10 were in the Census Bureau’s South region, which saw its resident population grow by 10.3% in the decade ending in 2020, more than any other region. Between robust population growth, which fuels rental housing demand, and greater availability of buildable land, the South is a conducive area for builders to develop single-family rental communities.

Outlook

SFR investments appear to be enjoying widespread success heading into the final months of 2021, as demographic and housing market shifts are fueling investor and renter demand. Measures of occupancy, rent growth and valuations are all near their all-time highs, as cap rates continue to compress and market liquidity improves. These results come as the JBREC/NRHC Single-Family Rental Market Index (SFRMI), a measure of overall SFR market activity, continued to expand in the second quarter of 2021. Further, the SFRMI Survey indicated that operators are upbeat on their assessments of current leasing activity and their forecast for leasing activity six months ahead.

All told, single-family rentals are quickly becoming the new starter home, as young households who struggle with residential mortgage affordability still desire suburban housing. SFRs continue to offer attractive housing options to fill a significant needs gap, which should continue to fuel positive renter and investor demand going forward.

For more single-family rental research and insights, visit arbor.com/blog

Single-Family Rental Investment Trends Report Q2 2021

Q2 2021
Single-Family Rental
Investment Trends
Report

Record Demand Sends Rents, Values Soaring as More Institutional Players Enter the Space

Key Findings

Occupancy rates rose to 95.3%, matching the highest level since 1994
Vacant-to-occupied (V20) rent growth accelerated to 12.7%, a record high
Cap rates dipped to 5.8% amid rising asset valuations

Table of Contents

State of the Market

The single-family rental sector (SFR) remained strong in the second quarter of 2021, with most indicators pointing to a solid expansion as the broader economy rebounds. Heading into the pandemic, the sector was already enthralled in a period of record growth, as rising technological efficiencies and growing institutional participation led to greater professionalization. In recent months, several high-profile acquisitions and capital raises have taken place.

Despite growing investment and attention in the national press, through 2020, there is little evidence that SFR operators have crowded out potential homebuyers in recent years. According to a Chandan Economics analysis of Fannie Mae securitized mortgages, the percentage of single-family units acquired by investors (a proxy for SFR) has declined consistently since peaking at 8.8% in 2011 (Chart 1).¹ The investor percentage of newly acquired single-family units was 4.3% in 2020, falling 30 basis points (bps) from a year earlier.

All else equal, the SFR sector is firing on all cylinders. Loan-to-value ratios (LTVs) were the only SFR-specific criteria to see some pandemic-related deterioration, and they have already quickly returned to pre-COVID levels. Record demand is leading to declining cap rates and surging rent growth, and the need to add purpose-built SFR supply is persistent. All signs are pointing to sustained growth for the SFR sector as it continues to both mature and evolve.

¹Data are retrieved from Fannie Mae’s Data Dynamics Portal.

Performance Metrics

Occupancy

As measured by the U.S. Census Bureau, occupancy rates across all single-family rentals averaged 95.3% in the second quarter of 2021, rising by 80 bps from the first quarter (Chart 2). The second-quarter reading brings SFR occupancy rates back to their generational highs, matching the same level from one year ago.

Rent Growth

Annualized rent growth on vacant-to-occupied (V2O) SFR properties consecutively hit record levels in March and April, the latest months of data availability, according to DBRS Morningstar.² April’s reading of 12.7% was the highest mark since tracking began in 2015 (Chart 3).

²Vacant-to-occupied (V20) units are single-family properties that were previously vacant and were recently leased by a new renter household. These units tend to adjust more quickly to seasonal and economic factors as they are not contractually tied to a base year rent and are free to adjust to prevailing market rents.

V2O rent growth has been surging since second-quarter 2020, as a tight housing market placed upward pressure on rents. Since May 2020, annualized monthly rent growth has averaged 8.1%, compared to a historical average of 3.3% over the metric’s lifetime.

For lease renewals, rent growth reached a record 5.2% annualized rate in April, the latest month of data availability. April’s reading is the third consecutive month when rent growth was 5.0% or higher, a level only reached once prior to 2021. Rents for renewals, which tend to see far less seasonal variability, fell dramatically at the onset of the pandemic, reaching as low as 1.4% in June 2020 — a sign that landlords were prioritizing tenant retention. It has since accelerated in each successive month, though momentum started to normalize as the economic recovery picked up.

At the metro-level, the Sun Belt has dominated SFR rent growth over the past year. According to CoreLogic’s Single-Family Rent Index (SFRI), the Arizona metros of Phoenix and Tucson saw the largest annual jump in SFR rents, climbing by 12.2% and 10.6%, respectively, from April 2020 through April 2021. Las Vegas posted the third highest one-year increase of 9.3%, followed closely by Atlanta (9.1%) and Austin (8.5%) rounding out the top five. Of the 20 metros in the analysis, only Boston and Chicago posted declining annual SFR rents, falling 5.9% and 2.6%, respectively.

Cap Rates

Property-level yields for SFR assets ticked down in the second quarter of 2021, reflecting strong investor demand and asset price growth. Through the second quarter of 2021, SFR cap rates averaged 5.8%, down 10 bps from the previous quarter and a weighty 81 bps from the same time last year (Chart 4).³

The second-quarter reading marks the lowest observed cap rates since Chandan Economics began tracking the sector in 2011. The yield spread between cap rates and the 10-year Treasury offers an estimate of the SFR risk premium (the amount of additional compensation investors need to justify taking on the extra risk). In the second quarter, this spread fell by 35 bps to 4.2% — the fourth consecutive quarterly decrease (Chart 5)

³ Unless otherwise noted, the Chandan Economics data covering single-family rental cap rates, loan-to-value ratios and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

This risk premium is now in line with pre-pandemic levels, reaching the lowest rate since the second quarter of 2019. The cap rate spread between SFR assets and multifamily properties fell to an all-time low in the second quarter of 2021, declining by 12 bps to settle at just 0.8%. In the past year, the spread has declined by a sizeable 63 bps. Moreover, it was still less than 10 years ago when SFR cap rates were more than 500 bps higher than multifamily averages — a function of the U.S. housing market’s return to health and the professionalization of the single-family rental sector, even among smaller operators.

Pricing

According to a Chandan Economics analysis of Fannie Mae securitized mortgages, there are material differences between the average assessed property values on mortgages originated to single-family owner-occupants versus single-family investors. Through 2020, the average underwritten value of a single-family investment property was $357,950 (Chart 6). Meanwhile, for owner occupied single-family properties, the valuation sat 9.7% higher at $396,293.

There are likely several factors that could explain this valuation gap. The first could be differing investment strategies, as many investors are targeting value-add assets rather than paying top dollar for value that already exists. A second group of potential contributing factors can be found at the property level. Investor-owned SFR properties often have vacancy, turnover and management-related expenses that owner-occupied units do not have to account for, which could also contribute to lower values for the rental units. Finally, financing for investment units is often more expensive than owner-occupied units, all else equal, which would also affect the valuation and explain part of the valuation difference.

Between 2004 and 2011, the valuation gap sat in a consistent range of 27.2% to 32.5% (Chart 7). As more investors and capital entered the SFR space, discounted units became harder to find, and competition for inventory ramped up. The valuation gap fell to an all-time low of 5.4% in 2017 and has moderated in the following years. The closing valuation gap comes as average valuations on SFR properties have risen more quickly than owner-occupied single-family properties in three of the last five years, including in 2020. According to these data, the valuation of investment single-family properties grew by 19.1% last year, outperforming owner-occupied single-family properties by 5.5% (Chart 8).

Credit Trends

LTVs on SFR mortgages increased in the second quarter of 2021, surging by 362 bps — the largest observed one-quarter increase post-Great Financial Crisis (Chart 9). The rapid rise in LTVs is a welcome sign of credit risk normalizing as the economy recovers. LTVs held up through the middle of last year, as SFR lenders remained cautious despite surging demand for housing that led to appreciably higher prices. In the fourth quarter of 2020, SFR LTVs reached a low of 61.0%, declining by 481 bps in half a year. The second-quarter 2021 reversion brings LTVs back within pre-pandemic range and signals confidence in the economic recovery and the housing market, even as stabilizing government policies are slowly removed.

Debt yields fell by 75 bps between the first and second quarters of 2021, settling at 9.2% — the lowest rate on record (Chart 10). The drop in debt yields translates to SFR investors securing more debt capital for every dollar of property-level net operating income (NOI). Through the second quarter of 2021, SFR debt increased to $10.82 for every dollar of NOI, a $0.81 increase from the prior quarter and a $1.42 increase from this time last year.

Supply & Demand Conditions

Residential Default Rates

During the 2008 housing crisis, investors with available financing took advantage of the market dislocation, acquiring large portfolios of single-family assets at steep discounts. According to the Federal Deposit Insurance Corporation (FDIC), mortgage default rates peaked at 8.1% in 2012, leading to an abundance of investor acquisitions and the beginning of the SFR sector as we know it today (Chart 11).

While home finances were stretched during the pandemic and many households are still behind, they have not translated into a wave of distress. Even as the federally extended measures of forbearance are coming to an end, most analyses do not forecast a rise in serious delinquencies resembling anything near Great Financial Crisis levels. Through the first quarter of 2021, the latest quarter of FDIC data availability, default rates across most banks have stabilized at 2.5% — 70 bps higher than the same time one year ago, though 4 bps lower than the previous quarter.

Build-to-Rent

Purpose-built SFR properties, known as build-to-rent communities, continue to become a defining feature of the SFR sector, especially within the institutional slice of the market.

However, as the industry has recognized the need for tailored supply pipelines, the strategies used to meet the demand are diverse. Some operators add new units piecemeal, constructing a singular unit on each parcel of land, while others opt for large-scale community developments. The nonuniformity is leading to product differences in price, size and amenities offered. As a result, renters drawn to the asset class have a more robust set of options to meet their housing preferences.

Based on an analysis of Census data, between 1975 and the start of the prior recession in 2007, SFRs accounted for a little less than 2.0% of all single-family construction starts (Chart 12). SFR’s share of single-family starts has since settled into a consistently higher range. In 2013, SFR’s percentage share of construction starts reached an all-time high of 5.8%, and through first-quarter 2021, the share remained elevated at 4.1%.

Tracking Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” is leveraged as a proxy for hotspots of SFR demand. Savannah, GA was the most popular area where the term was searched during the second quarter of 2021, dethroning Memphis, TN, which had seen the highest search in the previous period (Table. 1).

Sun Belt markets are continuing to dominate the list in 2021, much as they had through 2020. Institutional SFR strategies are most concentrated in the Sun Belt as there is a greater availability of buildable land, allowing operators to develop full rental communities. Moreover, the Sun Belt is experiencing population growth well above the national average, which should continue to support rental demand and regional economic growth.

Outlook

Fueled by population and economic growth in geographies best suited for the product-type, single-family rental strategies are enjoying unprecedented success. Measures of occupancy, rent growth and valuation are at their all-time highs. These results come as the JBREC/NRHC Single-Family Rental Market Index (SFRMI), a measure of overall SFR market activity, reached another all-time high in the first quarter of 2021. Further, the SFRMI Survey indicated that operators are extremely upbeat on their assessments of current leasing activity and their forecast for leasing activity six months ahead.

The SFR sector remains uniquely positioned to benefit from structural and cyclical forces, including filling a significant needs gap for affordable access into suburban housing markets, especially for younger families. All told, the SFR sectors recent run of success is both impressive and has yet to show any signs of slowing down.

For more single-family rental research and insights, visit arbor.com/blog

Single-Family Rental Investment Trends Report Q1 2021

Q1 2021
Single-Family Rental
Investment Trends
Report

Supply/Demand Imbalances Fuel Rising Valuations, Rents for Single-Family Product

Key Findings

Cap rates ticked up to 6.0%, up from 5.9% the prior quarter
Vacant-to-occupied rent growth accelerated to a new all-time high
Purpose-built single-family rental (SFR) units accounted for 4.5% of single-family construction

Table of Contents

State of the Market

If there were three real estate headlines to come out of the pandemic, they would focus on work-from-home trends, online retailing and single-family rentals (SFRs). By the end of 2021, the latter may be the only one of three to avoid some post-pandemic reversion. COVID-19 influenced which geographies and industries saw economic success in the past year and shifted housing preferences.

In major metropolitan areas, activity restrictions, acute job losses and public safety perceptions drove out residential demand — especially millennials with a loose attachment to their urban lifestyles. In adjacent suburban markets and smaller metros, demand sprang up as newly remote-working, former city dwellers sought a “new normal” amid a perplexing world event. SFR, a supply-constrained, still mostly mom-and-pop sector with a rapidly growing institutional presence, was uniquely positioned to absorb the sea change.

With SFRs now increasingly filling the role that starter homes had for previous generations, professional residential operators are quickly racing into the sector. According to Trepp, 2020 was the most active year for SFR securitizations on record, with new issuance topping $8.3 billion — a 99% increase from 2019 and a 9% increase from 2018’s previous record-high. Through mid-April, Trepp tracked $3.1 billion worth of newly securitized SFR CMBS, keeping 2021 on track to set a new record by year’s end. In line with these data, The Altus Group reports that institutional SFR operators are estimated to have purchased between 55,000 and 65,000 single-family homes last year, with 2021 forecasts landing north of 70,000.

All else equal, 2020 proved a banner year for the SFR sector. Before a real estate product type withstands its first recession, it is impossible to know for sure how it will perform during a downturn. The theory before the pandemic was that SFR was as recession resilient as they come and the past year confirmed just that. As the optionality of the single-family residential market grows to match that of the multifamily/condo space, professional SFR operators have their foot on the gas for what looks like yet another record-setting year.

Performance Metrics

Occupancy

As measured by the U.S. Census Bureau, occupancy rates across all single-family rentals averaged 94.5% in the first quarter of 2021, ticking down by 40 basis points (bps) from the end of 2020 (Chart 1). Occupancy rates do tend to have a degree of seasonality, especially in recent history. In the first quarters of 2018, 2019 and 2020, the occupancy rate in SFR units dropped on a quarter-over-quarter basis, even as declining vacancies remained the long-term trend. Measured year over year, occupancy rates are up by a total of 20 bps.

Rent Growth

According to DBRS Morningstar, annual rent growth on vacant-to-occupied (V2O) SFR properties1 rose to its highest level on record, jumping by 115 bps to 8.3% in January, the latest month of data availability (Chart 2). After thawing from its winter-2019 hibernation, V20 units were on track to repeat their cycle of annual seasonality. In the spring of 2020 — the period of the year when SFR rent growth tends to accelerate — the normal cycle was interrupted by the pandemic. Once the shutdown lifted and households started to reorganize themselves based on COVID-era realities, rent growth in previously vacant single-family units started to warm up in a big way. By June 2020, annual rent growth reached 6.2%, its highest reading since May 2016, and continued its climb through the year’s end. Between May 2020 and January 2021, the pace of rent growth accelerated in seven of the nine months, reaching its new all-time high in January.

¹Vacant-to-occupied (V20) units are single-family properties that were previously vacant and were recently leased by a new renter household. These units tend to adjust more quickly to seasonal and economic factors as they are not contractually tied to a base year rent and are free to adjust to prevailing market rents.

Annual rent growth for renewal properties rose by 17 bps to 4.8% in January, its highest level of annual growth since May 2019. Rent growth on lease renewals, which tends to see far less seasonal variability, fell between April and June 2020, dropping as low as 1.4% as landlords prioritized renter retention early in the pandemic. When landlords adjusted their pricing to match reinvigorated renter demand in mid-summer, rent growth intensified, climbing through the end of the year and into 2021.

Cap Rates & Prices

Property-level yields for SFR assets saw some upward pressure in the first quarter of 2021, partially reflecting rising benchmark interest rates. SFR cap rates began 2021 by ticking up to 6.0% — settling just above their record-low of 5.9% achieved the prior quarter.² Measured quarter over quarter, cap rates rose by 9 bps (Chart 3). However, year over year, cap rates are down by a weighty 65 bps, reflecting both a firming outlook on the viability of the sector and an abundance of investment dollars chasing an undersupply of assets.

The yield spread between cap rates and the 10-year Treasury offers an estimate of the SFR risk premium (the amount of additional compensation needed to justify taking on the extra risk). In first-quarter 2021, this spread fell by 39 bps to 4.6% — the third consecutive quarterly decrease, as the risk premium settles back to near pre-pandemic levels (Chart 4). Spreads between SFR and multifamily cap rates ticked up to 1.0% in the first quarter, rising by 10 bps from the end of 2020. At the outset of the housing crisis, SFR return premiums routinely sat more than 5.0% above multifamily. The secular decline of the SFR-multifamily risk premium reflects the increased liquidity, commodification and efficiency introduced into the SFR sector over the past decade.

²Unless otherwise noted, all Chandan Economics data covering single-family rental cap rates, loan-to-value ratios and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

The single-family rental sector’s institutionalization has meant that new, purpose-built rentals are starting to contain differentiating characteristics from other single-family homes. However, the institutionally held slice of the SFR market is still dwarfed by individual investors, reflecting the sector’s infancy.

As of the Census Bureau’s 2018 Rental Housing Finance Survey (released in fall 2020), individual investors accounted for 72.5% of all SFR assets. The collection of LPs, LLC and LLPs accounted for another 15.7%. Between real estate corporations and real estate investment trusts, the share of institutionally controlled SFR assets totaled just 2.3%. While dedicated single-family build-to-rent communities and greater product heterogeneity are emerging trends, most current single-family rental properties look just like any other single-family home.

Across the U.S. housing market, prices are generally accelerating. According to the S&P Case-Shiller National Home Price Index, valuations are up by a substantial 12.0% from a year ago through February 2021 — the fastest rate of home price appreciation since 2006 (Chart 5). Home prices are surging due to an extreme undersupply of available inventory compared to current demand. According to the Census Bureau and the Department of Housing and Urban Development, as of March 2021 there were 3.6 months of supply available to buyers. Put another way, if no new housing units were put up for sale, it would take 3.6 months to exhaust available inventory down to zero. In April 2020, there were 6.8 months of supply available. Prior to this past year, the last time there was so little inventory relative to existing demand was in 2004.

LTVs

Loan-to-value ratios (LTVs) on SFR mortgages continued to fall in the first quarter of 2021, sliding 50 bps to 59.9% (Chart 6). While LTVs do tend to fall during recessions, the current decline is unique. Historically, a recessionary dip in LTVs would be caused by falling asset values, which, in turn, would prompt lenders to build in higher equity cushions to guard against potential defaults. In the current market, the continued downward pressure on LTVs is more reflective of accelerating asset values and modest conservatism from debt providers in a period of bullish volatility.

Debt Yields

Debt yields nudged up by 26 bps between the fourth quarter of 2020 and the first quarter of 2021, settling at 10.4% (Chart 7). Debt yields have consistently sat between 9.8% and 10.8% since the middle of 2015. The inverse of debt yields, debt encumbrance per dollar of NOI, fell by 19 cents in first-quarter 2021, landing at $9.62 (Chart 8). These trends suggest that appetite for credit risk remains healthy despite the pandemic.

Supply & Demand Conditions

Residential Default Rates

During the 2008 housing crisis, investors with available financing took advantage of the market dislocation, acquiring large portfolios of single-family assets at steep discounts. Mortgage default rates soared to 8.1%, and an abundance of buyers began seeding the SFR sector as we know it today (Chart 9).

In the fourth quarter of 2020 (the latest period of data availability), default rates rose by 3 bps to land at 2.5%. While default rates increased for three consecutive quarters, the pace of new distress is decelerating. In the second and third quarters of 2020, default rates rose by 31 bps and 39 bps, respectively. While the recent trajectory of rising defaults is a mild concern, the current scale of non-performance hardly reflects a distressed market in absolute terms. As of the end of 2020, default rates sat in line with levels last observed in early 2018. A categorical difference between this crisis and the Great Recession is that today’s housing market has an oversupply of potential buyers, and prices continue to rise. At-risk homeowners have a better menu of options this time around, namely the ability to sell into a seller’s market and greater access to refinance capital. While an increase in housing market defaults remains possible, the current market’s economics should limit the frequency and severity of distress.

Build-to-Rent
Purpose-built SFR properties, known as build-to-rent communities, continue to become a defining feature of the SFR sector, especially within the institutional slice of the market. However, as the industry has recognized the need for tailored supply pipelines, the strategies used to accomplish this added supply are diverse. Some operators add new units piecemeal, constructing a singular unit on each parcel of land, while others opt for large-scale community developments. The nonuniformity is leading to product differences in price, size and amenities offered. As a result, renters drawn to the asset class have a more robust set of options to meet their housing preferences.

Based on an analysis of Census Bureau data, between 1975 and the start of the prior recession in 2007, SFRs accounted for a little less than 2.0% of all single-family construction (Chart 10). SFR’s share of single-family starts has since soared. In 2013, SFR’s construction share reached an all-time high of 5.8%. Today it remains elevated at 4.5%. SFR construction starts totaled 44,000 units through the 12 months ending in fourth-quarter 2020, up by 4,000 units from the previous period and only down 1,000 from its record high (Chart 11).

Tracking Future Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” is leveraged as a proxy for hotspots of SFR demand. Metropolitan areas in the Southeast dominated the list throughout 2020, and there are no signs of that stopping through the first quarter of 2021. For the third consecutive quarter, Memphis, TN, charted the highest frequency of the search term. The metro consistently ranked near the top of the list in 2020, never falling below seventh.

According to the National Association of Realtors, listed home prices for units for sale in Memphis are up a weighty 13.6% from a year earlier through March 2021. Moreover, according to a Chandan Economics analysis of the Census Bureau’s 2019 American Community Survey, Memphis ranks second and third in the country for the highest SFR share of single-family households and the highest SFR share of rental households, respectively.³ Through 2019, 32.6% of all single-family households in the Memphis metro area were renters. Further, 64.2% of all rental households in the Memphis MSA lived in a single-family property.

Moving past Memphis, metro areas in Georgia are well-represented near the top of the rankings, with Augusta in third, Macon in fifth and Savannah in seventh. Taking the region as a whole, the Southeast is undisputed as the epicenter of SFR demand in 2021. Within the top 25 on the rankings list, there are only three occurrences of non-Southeast metro areas.

³Analysis limited to the top 100 MSAs by population.

Outlook

In the next few years, the SFR sector will mature into a period of linear growth from the non-linear trajectory that has categorized 2019 and 2020. However, that transition is highly unlikely to happen in 2021. The sector shows no signs of slowing down, as short-term economic factors and long-term demographics both support a step up in demand for professionally managed single-family housing units.

According to survey data from National Apartment Association, Gen Zers have a higher preference for vibrant suburban life than the millennial cohort that precedes them.⁴ The survey results indicate that 43% of Gen Zers want to rent single-family homes following the completion of their university education. With the current age range of Gen Z spanning six to 24 years old, the first wave of this cohort is just now starting to make an impact on rental housing demand. These results come as the JBREC/NRHC Single-Family Rental Market Index, a measure of overall SFR market activity, reached an all-time high in fourth-quarter 2020. It’s clear the SFR sector remains uniquely positioned to benefit from the impacts of the COVID-related recession, and with its countercyclical resiliency now demonstrated, the year ahead is poised for exceptional growth.

⁴National Apartment Association survey was completed in partnership with Statisfacts/Apartment Ratings

For more single-family rental research and insights, visit arbor.com/blog

Single-Family Rental Investment Trends Report Q4 2020

Q4 2020
Single-Family Rental
Investment Trends Report

Valuations, Rents Rise as Urban Flight Combines With Tight Housing Supply

Key Findings

Single-family rental (SFR) cap rates ticked down to 5.9%
SFR return premiums narrowed to 5.0% above U.S. Treasurys, 0.9% above multifamily
Purpose-built SFR units accounted for 4.5% of single-family construction starts

Table of Contents