Is a Land Bubble Forming for Single-Family Rentals?

When developers are buying land for single-family rental communities, they have to make compromises.

To build in first-ring suburbs, where there is less available land that is usually more expensive, they’ll need to construct smaller communities. To produce larger communities, they need to move further out of large cities, according to Michael Carey, senior director at Altus Group.

But even that land is getting expensive.

“One thing that is happening right now is there are multiple bidders,” Carey says. “So the price of land is getting bid up. There’s so much money flowing into the marketplace that the outer rings are getting bid up.”

In some ways, the run-up in land prices is reminiscent of what happened in distant suburbs in the mid-2000s when home builders bid up dirt before the housing crash. “There are a few dangerous signs, but there is a lot of upside,” Carey says. “There is a lot of money chasing yield right now. So returns are getting driven down. You don’t have a lot of room for error here, so you really need to know what you’re doing.”

But there are reasons to be optimistic about single-family rentals. The nation’s largest cohort, millennials, are forming families, and the work-from-home policies that have increased through the pandemic have untethered people from their daily commute, at least temporarily. That has freed them to pursue the space that single-family rentals provide.

“Housing is underbuilt, and there’s a supply shortage,” Carey says. “Even further out, people still want affordable housing. I think COVID has really accelerated a lot of trends we saw coming. People want their yard, and they have that dog and the three-bedroom house with the kids. So are they going to want to move back?”

Investors see these trends, which is a significant reason why land is being bid up. For instance, Carey said he was recently approached by a Canadian pension fund that sold an apartment portfolio and wanted to invest in single-family rentals.

“They have all this money, and they need to reinvest it,” Carey says. “And so they’re looking at what they want to do.”

Right now, Carey says there aren’t a lot of other options. Retail and hospitality are struggling through the pandemic, and there are some long-term questions about office if work from home sticks after the pandemic. He says industrial is getting expensive and there are questions about multifamily.

“They’re not putting more into multifamily, but they still want to have a residential component,” Carey says. “So for them, single-family rentals make sense. We’re even seeing [interest in] manufactured housing or other alternative investment types like cell towers or cold storage or data centers. So we see a lot of that as well, but many of them want to keep some of their investment portfolio allocated to residential. We’re seeing money pour in right now.”