Interest in single-family rental homes has risen in the covid-19 era, as urban renters, liberated by increased work-from-home allowances, flee city centers for more spacious suburban settings.
Even before this year, the sector had benefited from a bevy of demographic and economic trends. Combined with the pandemic’s disruptions to how people work and learn, these factors have made rental homes a coveted – though largely untapped – property type for institutional capital.
“We actually wish we had more homes to rent because of everyone wanting to be in single-family homes,” Eric Lang, head of private markets for the Teachers’ Retirement System of Texas, said during the pension’s July meeting.
In 2018, the $148 billion pension committed $250 million to a joint venture with the Singaporean sovereign wealth fund GIC and Toronto-based single-family specialist Tricon Residential. Texas TRS counts rental homes as part of its allocation to “other real estate,” which is 17 percent of its exposure to the asset class.
Numerous firms have also been active in single-family rentals, employing a variety of strategies to put private capital to work throughout the so-called Sunbelt of southern and western states in the US.
Last week, Nuveen Real Estate made a strategic investment in a new single-family rental company called Sparrow. The New York-based firm will invest up to $400 million to help the start-up acquire and lease rental homes in select markets in Texas, Florida and Arizona. This makes Nuveen the latest institutional manager to dive headfirst into this property type.
In April, JP Morgan Asset Management launched a $625 million joint venture with the listed single-family specialist American Homes 4 Rent targeting a build-to-rent strategy in the West and Southwest. Tricon is taking a similar approach with a $400 million venture started with the Arizona State Retirement System last year; that venture currently has a community under construction in San Antonio, Texas and aims to build between 100 and 150 homes annually.
Other groups are taking more traditional private equity approaches. Brookfield Asset Management, for one, acquired a controlling stake in South Carolina-based Conrex Property Management, which owns 10,000 rental homes in the Midwest and South. The Toronto-based mega-manager also launched a $300 million fund to target single-family rental properties in July.
Meanwhile, Blackstone also returned to the space, having bought $300 million of preferred equity in Tricon Residential through its non-listed Blackstone Real Estate Income Trust in August, netting a minority ownership stake and a board seat. Frank Cohen, chief executive of BREIT, touted the “strong underlying fundamentals in the rental housing industry” adding that Tricon is “poised to generate stable performance.”
Blackstone was one of the first private equity-backed firms to make a splash in the space with the 2012 formation of Invitation Homes, a company that took the then-novel approach of buying up distressed homes in bulk, focusing primarily in the hard-hit Phoenix metropolitan area. It took Invitation Homes public in 2017 for $1.54 billion and sold its final shares in the company two years later.
Single-family homes first entered the private market sphere after the global financial crisis. Between 2006 and 2017, close to 4 million previously owner-occupied homes became rentals, according to a 2018 study from the University of California-Berkley’s Terner Center for Housing Innovation. At the end of 2015, detached single-family homes accounted for 37 percent of the rental housing market, according to the National Rental Home Council, a Washington, DC-based trade group.
Like rising rents for logistics warehouses or the dwindling appeal of secondary malls, the single-family rental sector is accelerating along its pre-pandemic trajectory, David Howard, executive director of NHRC, told PERE. “The covid crisis has brought more urgency to a trend we were already seeing, which is a growing rent-by-choice movement in this country,” he said, noting the growing popularity of leasing cars, electronics and even clothing.
In the single-family market, renting also removes the need to come up with a sufficient down payment or meet lofty credit requirements, Howard said, which have become high hurdles to clear, especially for debt-ridden millennials who are now starting families and forming households. The best markets for this property type have been the fast-growing metros of the South and West, where low costs have been a siren song for workers and companies alike.
During the pandemic, owners in this space have seen an influx of interest from renters of big city apartments looking for a change, Howard said: “A lot of families or individuals in urban high-rise properties are realizing they’re going to be working from home and/or schooling their kids from home for the foreseeable future,” he said. “They desire more space and they’re taking advantage of this point in time to move to the suburbs.”
In the third quarter of last year, NRHC and John Burns Real Estate Consulting, a California-based firm, launched an index to track the development of the sector through occupancy, current leasing activity and expected activity in the six months ahead. Measuring owner sentiment on a scale from 0 to 100, anything above 50 indicates expansion. During the second quarter of 2020, the industry registered a 76, up from 62 the quarter before. The survey found that 58 percent of operators saw faster uptake of homes last quarter and the overall occupancy rate was 96 percent, up 1 point from Q1 2020.
For example, Gary Berman, chief executive of Tricon, told PERE his firm’s 22,000-home US portfolio has stayed upwards of 97 percent occupied throughout the pandemic. “We only have a couple hundred homes to lease at any given time, but we’re getting 3,500 calls per week from people interested in renting,” he said.
The demand for standalone, single-family living has also manifested in the for-sale housing market. The home ownership rate saw its biggest single-quarter increase on record during the second quarter, jumping from 65.3 percent to 67.9 percent – the highest mark since 2008, according to the US Federal Reserve Bank of St Louis.
The shift toward single-family homes has been accompanied by an accelerated move away from gateway markets. Tracking changes to the home markets chosen by users, the social media platform LinkedIn saw a 23.4 percent decline in net arrivals to New York City and a 21.1 percent decline to San Francisco, while Jacksonville, Florida; Salt Lake City, Utah; and Sacramento, California saw upticks of 10.7 percent, 9.6 percent and 7.6 percent, respectively.
This movement away from dense, expensive cities has been underway for several years, Anthony Cazazian, head of US residential real estate for Man Global Private Markets, told PERE. The London-based firm has incorporated this trend into its US single-family investment approach, he said, adding that he expects the relative success of working from home during the pandemic to boost the sector, which is already benefiting from a supply-demand imbalance in the broader US housing market.
“The coupling of a historic lack of supply with the demographic trend of the largest generation entering the market on the demand side, plus tailwinds of covid and the changing of the way we permanently think about the workspace, we believe, bodes well for the housing market on both the rental side and ownership side,” Cazazian said.
An emerging market
Despite recent investments by high-profile investors and managers, institutional exposure to single-family rentals remains limited, accounting for just 2 percent of the 90 million-unit market, according to NHRC. That is a paltry share compared to the US multifamily sector, which is 55 percent owned by institutions.
New York-based Pretium Partners manages one of the largest single-family rental portfolios in the US, totaling nearly 40,000 homes and $9.3 billion of asset value. Dana Hamilton, the firm’s senior managing director and head of real estate, said there are fewer than 10 groups with similarly robust platforms for single-family. While she expects the field to become more competitive as large investors gravitate toward it, for now, the fact that it is underexplored gives the property type an edge over other residential strategies.
“You have fundamentals that are similar to multifamily long-term, but short-term you have incremental opportunities because the industry is expanding,” Hamilton said. “As an example, single-family has not yet fully developed ancillary income, which I’m confident will become a meaningful part of future revenues. Because single-family rentals are not as well understood as multifamily, you don’t yet have the same level of institutional demand. The result is that you get a 100 basis point-plus additional yield for similar risk, which to me is amazing because the growth prospects for single-family also far outweigh those for multifamily, particularly in the near term.”