Research Report Category: Single-Family Rental Investment Trends

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

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 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

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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

Residential Default Rates

State of the Market

The single-family rental (SFR) sector went into the pandemic atop a healthy wave of momentum. Since the onset of the pandemic, domestic migration patterns and shifts in housing demand have unilaterally added fuel to the SFR fire. The millennial cohort’s maturation, coupled with the obsolescence of cities during a pandemic, has meaningfully bumped up demand for suburban housing. According to John Burns Real Estate Consulting and National Rental Home Council, 59% of newly signed SFR leases are from households leaving cities. The long-term dwindling of starter homes and the growing tendency of householders to remain in their homes for longer make it exceedingly difficult for entry-level buyers to compete for a limited supply of inventory. This has resulted in an overflow of suburban housing demand, and SFR operators have proven more than ready to take advantage. The total market cap of the SFR sector is already within striking distance of multifamily, and there is a near consensus that SFR will continue to enjoy demographic tailwinds and increasing economies of scale for the foreseeable future.

Performance Metrics

Occupancy

As measured by the U.S. Census Bureau, occupancy rates across all single-family rentals averaged 95.1% in the fourth quarter of 2020, ticking down by 20 basis points (bps) from the previous quarter (Chart 1). The latest estimate keeps occupancy levels near generational highs last seen in 1994. From 2007’s lows, occupancy rates for all SFR properties are up by 5.4%. The occupancy rate for single-family, owner-occupied units sat at 99.1% at the end of the fourth quarter, holding steady from the previous quarter. Together, these trends reflect a market where demand for single-family housing is outstripping supply.

Rent Growth

According to DBRS Morningstar, annualized rent growth on vacant-to-occupied (V2O) properties rose by 50 bps to 7.5% in October 2020, the latest month of data availability (Chart 2). The October reading is the second highest for V2O properties since tracking began in 2015, and it comes just two months after reaching its all-time high of 7.8% in August.

Rent growth in vacant-to-occupied properties climbed steadily throughout 2020, despite pandemic-related headwinds during the initial shutdown. V2O rent tends to have a high degree of seasonality, reaching a bottom in the late fall and peaking in the spring. When pandemic-induced shutdowns began in the U.S. in March, the normal cycle of seasonal rent growth acceleration was interrupted. However, as time would prove, momentum was not thwarted but merely delayed. Since June, annualized rent growth has sat at 6% or higher, a level unseen since the spring of 2016. A tenant shift out of dense urban cities and a historically tight housing market are causing a bottleneck of demand for new SFR product, pushing rents higher.

Year-over-year rent growth in lease renewals rose 62 bps in October to an annualized 4.1%, on par with its pre-pandemic mark in March. Rent growth on lease renewals, which tends to see far less seasonal variability, fell dramatically between April and June, dropping as low as 1.4% — a symptom of landlords prioritizing renter retention during the worst days of the recession. Since then, rents have risen considerably but remain below the 4.5% average growth rate between the start of 2019 and when the recession took hold in March 2020.

Cap Rates & Prices

Property-level yields for SFR assets continue to fall. In fourth-quarter 2020, SFR cap rates ticked down to 5.9% — their lowest level on record. Measured quarter over quarter, cap rates fell by a remarkable 61 bps (Chart 3). Moreover, since second-quarter 2020, SFR cap rates are down 79 bps. Continued cap rate compression reflects asset price appreciation, low benchmark interest rates and growing operational efficiencies.

Spreads between SFR and multifamily cap rates settled at 0.93% to end 2020, falling by 53 bps from the prior quarter and marking the most substantial single-period drop since late 2015. These data trends offer support to what most market watchers already know to be true: While there remains a yield premium for holding SFR assets as opposed to the same number of units in a multifamily property, the premium is falling fast.

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 U.S. Census Bureau’s 2018 Rental Housing Finance Survey (released fall 2020), individual investors accounted for 72.5% of all SFR assets. The collection of LPs, LLCs and LLPs made up another 15.7%. Between real estate corporations and real estate investment trusts (REITs), the share of institutionally controlled SFR assets totaled just 2.3%. While the emerging trends may be for dedicated SFR communities and greater product heterogeneity, most SFR properties currently look just like any other single-family home.

Across the U.S. housing market generally, prices are accelerating. According to the S&P Case-Shiller National Home Price Index, valuations are up by 9.5% year over year through November 2020, more than doubling the growth rate of 3.7% reported one year ago (Chart 5). According to CoreLogic, housing prices are getting squeezed by extremely tight inventory levels. The share of housing units selling in less than 30 days on the market soared to 33.9% through October, toppling the previous peak of 21.4% reached in 2004.

LTVs

Loan-to-value ratios (LTVs) on SFR mortgages fell by a weighty 5.4% in the fourth quarter of 2020, settling at 60.4% (Chart 6). LTVs tend to fall during a recession, reflecting more conservative underwriting. Here, the pandemic appears to be a double-edged sword. Not only is there evidence of fewer ultra-high LTV loans, but underlying asset values have accelerated during the pandemic — a unique feature of this particular downturn.

Debt Yields

Debt yields ticked down by 26 bps between the third and fourth quarters, averaging 10.2% (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, rose by 25 cents in the fourth quarter to $9.81 (Chart 8). These trends suggest that appetites for credit risk remain healthy despite the pandemic.

Supply & Demand Conditions

Residential Default Rates

During the 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 over 8%, and an abundance of buyers began seeding the SFR sector as we know it today (Chart 9).

Default rates rose by 39 bps in the third quarter of 2020, landing at 2.5% — the largest quarter-over-quarter jump since first-quarter 2010. Moreover, default rates are up 67 bps year over year. While the trajectory is concerning, current default rates do not constitute distress in absolute terms. The inflection brings default rates just below levels last seen in early 2018. A categorical difference between this crisis and the Great Recession is today’s housing market has an oversupply of potential buyers, and prices continue to rise. At-risk homeowners have better 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, if not likely, the current market’s economics should limit the frequency and severity of distress.

Build-to-Rent
Build-to-rent continues to become a significant feature of the SFR sector. A lack of tailored supply has led to unique and diverse strategies to add inventory. 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 along the lines of price, size and amenitization. As a result, renters drawn to the asset class have a more robust set of options to optimize their housing decision.

Based on an analysis of U.S. Census Bureau data, between 1975 and the start of the prior recession in 2007, SFRs accounted for less than 2% of all single-family construction (Chart 10). The SFR share of single-family starts has since climbed. In 2013, the SFR construction share approached 6%, and today it remains elevated at 4.5%. SFR construction starts totaled 42,000 units through the 12 months ending in third-quarter 2020, up by 3,000 units from the previous quarter and only down 3,000 units from its all-time high (Chart 11).

Tracking Future Demand

Utilizing Google Trends, the popularity of the search term “homes for rent” is leveraged as a proxy for existing and future hotspots of SFR demand. Metropolitan areas in the Southeast dominated the list throughout much of 2020, including in the fourth quarter. For the second consecutive quarter, Memphis, Tennessee charted the highest frequency of the search term (Table 1). The metro consistently ranked near the top of the list in 2020, never falling below seventh.

A ranking produced by Mynd Management, an Oakland, California-based SFR property manager, ranked Memphis as the second best market for sellers in 2021 based on appreciation trends from the past two years. Like several other smaller, less-dense cities, Memphis has benefited from growing demand for properties outside of the nation’s more expensive metros — a pre-existing trend that has accelerated during the pandemic. Moving past Memphis, metro areas in Georgia continue to dominate the top 10. Macon and Savannah come in at second and fourth, respectively, in the rankings. Thomasville and Atlanta also arrive in the top 10, as they did in the third quarter.

To track which parts of the country might expect to see new demand in the coming months, we measure the popularity of the search term between the third and fourth quarters of 2020, noting where the biggest jumps occur. Leading the way is Meridian, Mississippi, which jumped 192 spots to land at number 13 on the list — the largest quarter-over-quarter jump of any metro in 2020 (Table 2).

Outlook

Over the near term, the single-family rental sector remains well positioned to grow from secular and pandemic-created trends. While working from an office may become more common in the years ahead than it was in 2020, there is a growing sense that we are unlikely to go back to a pre-pandemic model. According to a PwC survey, only one in five executives believes having their entire team in an office five days a week is optimal. If greater workplace flexibility becomes a lasting trend post-pandemic, it will also translate into greater housing choice flexibility, likely boosting demand for exurban options.

Moreover, the ‘mom and pop’ dominance of the SFR sector leaves significant room for product improvement and managerial efficiencies. For 2021, the pandemic’s continued strain on household finances combined with rising lumber prices, a critical construction input for single-family homes, are moderating factors to keep an eye on. The balance of risks, however, are heavily outweighed by supporting fundamentals and demographic tailwinds. All else equal, SFR is in a good position to continue its bull run through the year ahead.

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

Single-Family Rental Investment Trends Report Q3 2020

Q3 2020 Single-Family Rental Investment Trends Report

Demographic and Migration
Demand Outweighs
Short-Term Risks

Key Findings

Cap Rates Ticked Down to 6.5%
SFR Return Premiums Narrowed to 5.9% Above Treasuries
Occupancy Rates Held Steady at Multi-Decade Highs

Table of Contents

Build-to-Rent

Tracking Future Demand