The single-family rental (SFR) and build-for-rent (BFR) space is emerging as one of the strongest growth sectors in commercial real estate. While the SFR market has made up a portion of the rental market for many years, historically individual and small-scale investors have dominated the market. Institutional investors have only invested in the space for the last 10 to 12 years since the end of the Great Recession.
Demand for SFR has been steadily increasing due to current demographic trends related to Gen Y and baby boomers; however, migration patterns related to COVID-19 have accelerated that demand. SFR growth is expected to outpace multifamily, office, retail, storage and hospitality growth by 2022. As the demand for more SFR properties grows, an increasing number of larger investors are expanding their investment strategy to include the product.
With the SFR asset class gaining more attention, the BFR sub-segment is playing an emerging role in large-scale investors’ portfolios. The SFR market is estimated at $3.4 trillion, compared to $3.5 trillion for the multifamily market.1 Institutional investors make up less than 2 percent of the SFR market compared to 55 percent for the multifamily market. As more young families, families with children and retirees look to rent single-family homes with yards and upscale amenities on a long-term basis, more investors are looking to the SFR and BFR markets to expand their portfolios and grow their capital.
The SFR and BFR acronyms are often used interchangeably among those in the commercial real estate business; however, there are a few distinct differences that may affect the type of available financing.
An SFR is generally defined as a cluster of homes in various geographies pooled together for investment purposes. These properties include single-family detached homes, townhomes and two- to four-unit properties. SFR properties can be found in almost every market in the country; however, rural markets make up 66 percent of the rental housing stock.2 The SFR market has been a long-standing asset class in the overall rental space, but larger institutional investors have more recently started to take notice and have begun entering the market.
BFR properties are purpose-built housing to be operated as SFR investments, much like traditional multifamily properties. All the homes in a BFR community are contiguous and operate as one rental community. BFR is a relatively new concept among SFR investors, national homebuilders and developers. It has become increasingly popular to investors in recent years, including traditional multifamily developers. While the BFR market only makes up about five percent of new homes built, it is rapidly growing and will continue to do so as new entrants begin BFR operations.
Facts & Figures About the SFR/BFR Market
- SFR growth is expected to outpace multifamily, office, retail, storage and hospitality growth by 2022.3
- 5-10 percent new build homes are BFR.4
- As of Q4 2019, SFR/BFR, including attached units and townhomes, composed 8 percent of all housing units in the U.S., with over 16.5 million homes.5
- SFR/BFR entered 2020 with a 20-year high in occupancy rates of 94.4 percent.6
- SFR/BFR rents were up 4 percent YOY as of January 2020.7
- The top SFR rent growth markets in the U.S. in 2019 were Phoenix (10 percent), Atlanta (7.1 percent) and Orlando (7.1 percent). The lowest rental growth markets were Cincinnati (2.4 percent), Nashville (2.6 percent) and San Antonio (2.9 percent).8
- The top SFR/BFR markets in the country by total unit count are Atlanta (290,000), Houston (269,000) and Phoenix (246,000).9
- SFR/BFR have the lowest vacancy rates since 1984 due to persistent demand and continued undersupply.10
Who is Investing & Lending in the SFR Space?
The SFR rental space has quickly scaled into an institutional asset class. In less than a decade, Colony Starwood American Residential, Progress Residential, Tricon Residential, Amherst Capital, AltaSource, Front Yard Residential and American Homes 4 Rent have all solidified proof of concept for the SFR industry.
Invitation Homes is now the single largest owner. Brookfield recently acquired SFR landlord Conrex and has raised $300 million to purchase and renovate homes under the name Brookfield Single Family Rental. Brookfield made the investment in their open-ended fund vehicle, which suggests a longer-term presence in the space.11
In 2017, Freddie Mac and Fannie Mae explored the SFR space after the Federal Housing Finance Agency (FHFA) highlighted its importance for rural communities in their Duty to Serve regulation. However, in 2018 FHFA decided to not extend the program. With Fannie Mae and Freddie Mac out of the SFR market, there seems to be a large void in lending. The lowest cost of capital currently available is around 4.5-6%, while other sources are over 8%.
Who is Investing & Lending in the BFR Space?
Several of the industry leaders mentioned above are continuing to target value-add existing homes, while also focusing on BFR assets as part of their overall growth initiatives. There are new groups of operators, national homebuilders and institutional equity providers pursuing BFR as a stand-alone investment model. Lennar, the second largest home builder in the United States, is in the early stages of raising third-party capital in a close-ended vehicle dedicated to the BFR space. The vehicle will acquire homes directly from the company’s home building arm and hold them longer term in a current yield-oriented vehicle.
As the space evolves, additional institutional equity sources are entering the market. In May of 2020, JP Morgan Asset Management made a $625 million equity commitment to American Homes 4 Rent to develop approximately 2,500 homes in high-growth markets across the West and Southeast. The single-family REIT’s existing footprint, established operational platform and broadscale development capabilities made them an attractive partner for a programmatic equity joint venture. The Top 50 private equity funds, pension advisors and insurance companies have already entered the sector and are actively investing.
Supply & Demand
In the United States, housing demand has outpaced housing starts since 200712. Although new housing starts have increased in the last three years, current new housing deliveries are 9% below the historical average. A recent Freddie Mac study states that the U.S. economy is 2.5 million housing units below what is needed to match long-term demand.
As the housing deficit grows, the increasing lack of affordability of these homes will force more would-be home buyers to rent. Millennials with fewer years of saved earnings will be particularly affected by these forces as the down payment amounts grow at a much faster rate than wages.
Build-for-rent properties are ideal to help bridge the housing deficit and affordability issues for single-family dwellings, particularly in the high-growth markets in the Sun Belt, where this imbalance is more pronounced. Home ownership has been on a steady decline. 65.3% of households are owner-occupied, down from a high of 69.2% in 2005.
We have watched the SFR and BFR space grow from a concept to a full-blown asset class. Walker & Dunlop is currently active with over fifty groups in the space, ranging from institutional clients, homebuilders, multifamily developers and individual investors.
As the BFR space has evolved, so too have capital sources. Banks, debt funds and some life companies have entered the BFR lending market. Freddie Mac and Fannie Mae have become active in the space, and the Walker & Dunlop team is currently placing construction debt, bridge debt and permanent debt, along with equity and structured finance within the BFR arena.
The SFR/BFR space will continue to be a necessary part of the rental market for years to come, and with market demand for more rental house stock continuing to outpace supply, it will continue to attract investment dollars.
— By Cliff Carnes, Western Region CPO — Capital Markets; Ted Patch, Chief Production Officer — Multifamily Finance; and Kris Mikkelsen, Executive Vice President — Investment Sales, Walker & Dunlop. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.
See the full Walker & Dunlop team announcement on the BFR arena here.
To learn more about Walker & Dunlop’s view on the BFR market, including information on lending, capital brokerage or investment sales opportunities, download their whitepaper.
1 Magnify Capital
3 Freddie Mac
4 U.S. Census Bureau
5 John Burns Real Estate Consulting
6 John Burns Real Estate Consulting
7 John Burns Real Estate Consulting
8 John Burns Real Estate Consulting
9 John Burns Real Estate Consulting
10 U.S. Census Bureau
13 U.S. Census Bureau