There’s an anomaly in the home construction industry. More than one-third of all single-family homes wind up as rentals, but only a fraction (about 5% of all new homes constructed in a calendar year) are built to be rented.
In recent years, however, the idea of building single-family homes for rental purposes has been gaining steam. Large institutional investors, such as American Homes 4 Rent, NexMetro and Tricon Residential Inc. are developing single-family rental communities and hold thousands of units in their portfolios. These communities began cropping up in Sun Belt states a few years ago and the model has been spreading across the country.
One reason is demographics. Pre-pandemic, single-family rentals were growing in popularity among the sizable millennial generation. Millennials are starting families and are looking for more space but can’t afford or don’t necessarily want to buy a home. The COVID-19 crisis also is spiking demand for single-family rentals. People are fleeing congested apartment buildings and downtowns in favor of detached homes in suburbs, seeking extra space to build home offices and gyms.
“What COVID has done is, it has just accelerated a lot of those demand drivers,” says David Howard, executive director of the National Rental Home Council. “We’re seeing a lot of demand from, for example, millennials who have young children, who for whatever reason, are not in a place where it makes the most sense for them to buy a home. But they want more space than they could get in an apartment building in some downtown environment.”
Howard also says the pandemic has made single-family homes more attractive to the average renter who needs more space.
“The industry is really benefiting from the realities associated with working from home and kids staying home from school,” Howard says. “People are looking for more space. … We’re certainly seeing families transitioning out of urban environments and out of smaller apartments, looking for more space, looking for a yard, looking for access to schooling, things like that.”
Even with the emergence of institutional players, built-to-rent homes comprise a small slice of all new-home construction. According to the National Association of Home Builders (NAHB), roughly 42,000 single-family rental homes were built during the 12 months ending in third-quarter 2020.
NAHB chief economist Robert Dietz says the build-to-rent model is a trend to watch, but the market itself will likely grow slowly over the next few years. He predicts about 50,000 to 60,000 single-family rental units will be completed this year.
“I would expect the market share of single-family built-for-rent homes to go up in 2021 because there are plenty of people who were looking for a single-family home, but they can’t afford the downpayment,” Dietz says. “So, there is a rental-market opportunity there.”
John Beacham, CEO of Toorak Capital Partners, says that builders inevitably should produce more rental homes as the market has an obvious anomaly. About 95% of new single-family homes are built for owner-occupied purposes, but eventually more than one-third of these units become rentals.
“There’s a real market need for this product right now, especially in the middle of the coronavirus pandemic,” Beacham says. “A lot of people, a lot of families are moving into rental homes. …The market will evolve, so the supply will ultimately meet the demand.”
Even with emergence of large institutional investors, the majority of investors in single-family rentals hold fewer than 10 properties, Beacham says. Fannie Mae and Freddie Mac have traditionally dominated this small-investor space, but the future growth of the industry will likely be fueled by smaller private lenders, according to Beacham. He says that private commercial lenders have some advantages over the government-sponsored enterprises.
Commercial mortgage lenders, for example, view single-family rental loans purely as business-use financing. They primarily evaluate the rental income and the investor’s ability to service the debt, rather than emphasizing personal income and debts. This difference gives the private lender more flexibility to qualify borrowers for financing, Beacham says. Beacham also says that more commercial real estate lenders are bound to enter this particular niche of the single-family residential market. This is because they are more comfortable working with investors rather than homebuyers.
“A lot of commercial lenders who are used to doing business-purpose loans aren’t necessarily familiar with the regulations that are around consumer loans,” Beacham says. “The properties often are owned through an LLC and other corporate entities. It’s much easier for a commercial lender to get into this business.” ●