Are Single-Family Rental Values Becoming Inflated?

There is a lot of capital chasing single-family rentals, especially those that are purpose-built.

But is the market becoming too frothy?

Tom MacManus, president, MONEY360, thinks it might be. “Developers and builders of single-family [rentals] can get top-notch pricing,” he said on a panel discussion during GlobeSt. Apartments Spring 2021 virtual conference held last week.

MacManus wonders how sustainable it is for third parties to buy new single-family rentals at those prices. “Some of that, to me, doesn’t sound like it passes the test for the long-term,” he said.

But that feeling wasn’t universal on the panel. Trevor Koskovich, president of investment sales at NorthMarq, has around $250 million of single-family rentals in the market today. “We completed big portfolios of this stuff,” he said.

Koskovich’s confidence in SFRs stems from the demand that he sees from the two largest demographic groups—baby boomers and millennials. He said many millennials are so saddled with student debt that it may be hard for them to purchase a home. “The millennials that have dogs and are starting to expand their family for the first time are going to rent these,” he said.

Baby boomers have other motivations. “You also have a quantifiable amount of baby boomers whose only net worth is built up in their home,” Koskovich said. “That’s where they’ve manifested most of their net worth.”

Eventually, those baby boomers will cash out, according to Koskovich. “They’re going to go to a fixed cost environment in the Sunbelt environment,” he said.

With these two large demographic groups driving demand, Koskovich thinks SFR rents are sustainable. “I think they’re going to continue to grow,” he said. 

Along with the potential to meet the lifestyle needs of the two largest demographics, SFRs also provide investors with a hedge in the real estate living business, according to Koskovich.

“If rents are depressed because home sales are up, you sell the homes,” Koskovich said. “If the rents are climbing, you don’t sell the homes. It is the ultimate hedge.”

Koskovich said there is “a sliver” of people playing both sides of the market. “They’ve figured out how to manage it,” he said. “They’ve figured out how to deliver apartment-level management to something that was traditionally run by mom and pops.”

All in all, Koskovich sees a lot of growth in the market. “It’s a huge part of where we’re going,” he said. “I think it’s going to triple or quadruple in size in America because we’re going to have a lot less homeownership just generally speaking over the next 20 to 30 years, which means rents are going to increase.”