Single-Family Rental Sector Tailwinds
Only 2% of single-family rental homes are currently owned by institutions and that number is growing significantly every day1. In a recent interview, Brian Mitts, NexPoint Chief Financial Officer stated, “there’s plenty of room for growth because it’s still a young industry, so there’s a lot of consolidation and new capital flowing in.” In 2020 and 2021, over $30 billion was poured into the real estate sector to capitalize on the growing demand for single-family rental housing2.
There are four key areas driving demand for rentals and subsequent capital flow.
Tighter Lending Standards
While the pandemic increased the visibility of housing affordability, affordability has been a key concern for much longer as demand continues to outpace supply and lending standards begin to tighten. Although the market is currently seeing lower interest rates, higher home prices make up the difference creating less affordable options and driving demand for rentals.
Millennials represent the largest age cohort in American history, with an estimated U.S. Population of 72.1 million. This group, known for their inherent adaptability and flexibility, is now migrating to the suburbs in larger quantities. This deurbanization of the millennial unit is brought on by multiple factors, including the obvious COVID-19 pandemic and the growing need for space. As the “work from home” era carries on, the need to live close to an office may no longer be a priority. This welcomes a new home base option for the world’s working class, often with more space for less money.
Renters by Necessity and Choice
As home prices increase and the market for purchasing a home becomes more and more competitive, the dream of home ownership is often put on hold until that goal can be financially met. These renters are called “renters by necessity”. Mitts notes “while they may not be able to qualify for a mortgage or have the money for a down payment, they can pay rent” ultimately setting the stage for continuous single-family rental demand.
There are many appealing factors that drive renters to maintain this lifestyle outside of necessity. Many people choose to rent simply for the flexibility. A large portion of their net worth isn’t tied to one asset or location and offers the freedom to pursue employment or educational opportunities in various geographical areas. Convenience also plays a factor in the decision to rent v. own. Having a landlord eliminates many of the headaches and costs related to the maintenance and upkeep of owning a home.
The Future of SFR
The constant demand for rental housing is propelled by the obligatory need for housing. Mitts says, “institutional support should streamline and continue to drive the SFR real estate sector, much like what occurred during the 1990s with the multifamily boom.” The strong fundamentals in place before the recession have only been amplified by COVID-19, causing more and more demand amongst all age groups. Furthermore, there is plenty of room for institutional players, as only 2% is institutionally owned. The increased growth and competition stemming from increased institutional ownership should benefit investors and renters alike.
- National Rental Home Council
- Real Estate Consulting