The purpose of the Light is to highlight bright spots in the real estate market in the wake of a historic pandemic. Perhaps no other real estate asset class performed as well or garnered as much interest since COVID hit than the single-family rental (SFR) space. We define SFR as a single-family detached or attached home available for rent. Walls can be shared, but the homes cannot be stacked. The build-to-rent (BTR) space is a subset of SFR, and we define BTR as a dedicated neighborhood of homes constructed expressly for the purpose of renting. We at John Burns Real Estate Consulting are fully immersed in the SFR and BTR world and have analyzed market attractiveness for the product. We recommend product and rents for hundreds of open and planned BTR communities around the country. Below is some of what we have found.
- The pandemic did not create the SFR/BTR trend, but it accelerated it. Rental housing has long been an important component of the nation’s housing stock, accounting for more than 50% of occupied homes from the early 1900s up to the 1940s, when the introduction of the GI Bill kicked off a surge in homeownership. Foreclosures of single-family homes following the Great Recession helped reverse the trend, and renting a single-family home has become a popular choice. We estimate approximately 16.4M single-family rental homes nationally, meaning there are about the same number of rental homes as apartment communities (with 10 or more units).
- Single-family rents are more stable than apartments or home prices. On a national basis, single-family rent growth has historically stayed positive, even during recessions. We recently published our Burns Single-Family Rent Index report, which showed US single-family rents up 3.9% YOY in August, exceeding the 3.4% YOY historical average dating back to 1985 (more analysis here). Not one of the 63 markets we track nationally experienced YOY rent declines. Sector fundamentals remain solid. John Burns Real Estate Consulting is currently forecasting annual SFR rent growth in 2020 and 2021. We expect those Sunbelt markets with diversified economies that were outperforming pre-COVID will continue post-pandemic. We anticipate high-growth markets like Phoenix, Salt Lake City, Tampa, Dallas, and Charlotte will outperform the nation overall.
- BTR homes typically lease up quickly, maintain strong occupancy rates, and achieve significant rent premiums. Clearly the performance of a BTR community will depend on a multitude of factors, including its location (rated as the top factor influencing rents in a John Burns poll), product and amenity offering. We analyzed more than 250 active BTR neighborhoods in our database (must be dedicated rental communities of 25 homes or more). We determined that dedicated BTR communities can garner premiums ranging from 10% to 40% above equivalent-sized apartments or “one-off” stand-alone existing SFR homes located in traditional for-sale neighborhoods. These BTR neighborhoods often boast strong lease-up rates (most ranging from 5 to 20 nationally depending on the product and leasing execution), and historically those homes experience lower turnover (28% to 35%) than apartments. Strong demand is also reflected in high occupancy rates. As of the third quarter, the reporting BTR communities in our database reported a stabilized occupancy of 97%.
- A portion of tenants of SFR homes and BTR communities are renters by choice. Our research has shown that the bulk of households living in BTR communities are aged from 25 to 54, have relatively high incomes, and currently prefer to rent a home rather than owning one. Aging millennials, the oldest of whom will turn 40 in 2020, are now moving into family formation years. And while many of these older millennials are purchasing homes, others are choosing to remain renters and are selecting dedicated, BTR neighborhoods. These neighborhoods often include on-site leasing and maintenance and their own amenities as an alternative to more densely populated apartments with common hallways and elevators. While the demographic and shifting consumer preferences that helped drive demand for SFR/BTR homes were already underway, COVID fueled the need for extra space that consumers demanded, it accelerated the shift to less dense cities and homes, and it was buoyed by a higher-income renter who was less susceptible to job losses than apartment renters.
We continue to remain bullish on the SFR/BTR sector and are helping our clients evaluate existing SFR homes and new BTR communities every day—in markets you would expect (Phoenix, Austin, Denver) and many you might not. In 2020 alone we have assessed more than 110 BTR neighborhoods located throughout 21 states and 41 MSAs. Let us know how we can help.