SFR Boom Times Are Over As Investment Drops, But Some Like The Long-Term Play

Following a year of explosive growth in 2021, driven by a cohort of Americans who wanted larger living quarters as remote work swept the country, investment in the single-family rental industry fell 70% last year and is on pace to clock a smaller total in 2023.

Investment in SFR fell to $13B in 2022 from $44B in 2021, according to John Burns Research and Consulting, which tracks figures released by investors. So far in 2023, $2.3B has been invested in the property type.

Debt and equity financing have both slowed as interest rate increases, economic unease and concern about the stability of regional banks make both investors and financiers cautious to approach SFR, even though its demand drivers remain strong.

“We talk to various equity groups about single-family rental,” Kaplan Residential President Morris Kaplan said. “And the first question they ask is, ‘Who's your lender?’ And then when we talk to lenders, they ask, ‘Who's your equity?’ It's a chicken-and-egg routine.”

The drop in investment follows an enormous leap from $3B in 2020 as Wall Street firms poured cash into the single-family rental business. Criticisms followed as the nation's housing crisis persisted and more people were priced out of homes. The recent slowing appears to be a normalization of sorts, especially in light of challenging macroeconomic conditions.

Investors haven't lost interest completely, Kaplan said, because they understand the strong demand across the board for residential properties of any kind. 

As with many types of investment these days, big names with proven business plans are able to get deals done. 

For example, in the biggest SFR deal so far in 2023, major homebuilder D.R. Horton dropped $1.5B to acquire a portfolio of houses from Pretium Partners.

Owners have had no trouble renting single-family units. RentCafé reports a 97% occupancy level for the property type, compared with about 95% nationwide for standard apartments. 

Rents are sagging though, according to April Kroll Bond Rating Agency data. Rental rates in the top 10 U.S. SFR markets were down 5.3% between September 2022 and February 2023, compared with a national multifamily average rental rate decline of 1.9% in the same period, KBRA reported.

A wave of new development stemming from 2021’s huge investment totals is likely partially to blame for the lower rents. More than 14,500 units were completed nationwide last year, according to RentCafé, an increase of 47% compared with the year before, and more than double the average from 2016 to 2020 of about 6,650 units.

In addition to downward pressure on rents, single-family developers of all stripes are facing upward pressure on expenses, including increases in construction costs, insurance and property taxes, KBRA said. 

High borrowing rates slowed SFR investment in the latter half of 2022, John Burns Vice President of Research Danielle Nguyen told Bisnow. But as 2023 progresses, deals and capital have slowly started to pick back up — just at a muted pace compared to 2020 and 2021.

“Everybody's facing the same troubles,” Wolfson Development Co. CEO Adam Wolfson said. “Construction financing is more challenging now, and requires more equity, but an experienced developer should still be able to get the right valuations and still be OK. Still, there's less willingness to lend. We've been fortunate in the sense that we have our own discretionary funds, raised mainly from high net worth investors, which have allowed us to keep expanding.”

In May, Wolfson Development completed the sale of its Cantabria build-to-rent project in Bradenton, Florida, to an institutional buyer for $59M. As the managing partner of the project, Wolfson developed the 184-unit project in conjunction with major homebuilder Lennar. Including Cantabria, the company has a pipeline of about 2,000 units.

“BTR deals are getting done, albeit at a slower pace given the volatility within banks, which has led to some development deals not being capitalized,” Tower Capital Senior Vice President George Maravilla said. “But we’ve been able to find nonbank capital sources to fund BTR development.”

Tower Capital's pipeline of BTR financings reflects that trend, Maravilla said, with the company closing on nearly $210M in BTR financing in June and with roughly $300M more in the works to close this summer.

In early June, Tower Capital arranged $120.5M in combined financing for two Phoenix-area BTR projects by Empire, including Village at Pioneer Park, a newly constructed 332-unit community, and Village at Skyline Ranch, a 167-unit community currently under development.

In the long run, demand will sustain the sector, experts say, both for investment in single-family properties and build-to-rent development.

“The sector is just stabilizing now under current market conditions, but there's certainly still a high level of interest, and we see it as a growth opportunity moving forward,” said Berkadia Vice President of Institutional Client Services Jeff Coles, who leads the company's single-family rental specialty.

There is still an increased demand for suburban or exurban living, especially in parts of the country seeing in-migration, Coles said.

People who rent houses include millennials, but also a fair number of baby boomers, with many of the former seeking affordability and many of the latter flexibility. For households that can't afford, or don't want, a mortgage, SFR can represent a strategy to raise their level of living, Coles said, enabling them to access better school districts and neighborhoods than they can afford as a standard buyer.

Still, growth in the sector might never see the kind of post-2020 surge that ended last year, but proceed at a more moderate pace, Coles said.

“Current single-family investors or even owners don't want to give up their low-rate mortgages, and that is impacting the product available in the market,” Coles said. “Also, the lack of available financing for this space hinders the market, like other real estate sectors.”

“Although there are headwinds, overall it's still a strong sector,” Coles said. "Sales will pick up again in the coming years."