SFR Poised to Be as Prevalent as Multifamily

The single-family rental market was already heating up before the pandemic. Now, it has quickly transformed into one of the top investment asset classes in commercial real estate. With strong demand and institutional capital entering the arena, the single-family rental market is on track to be as prevalent as multifamily.

“The single-family rental concept is not new, but it has been blossoming over the last several years and most notable since the onset of COVID-19. That is when we really saw things picking up,” Dori Nolan, SVP of national client services at Berkadia, tells GlobeSt.com. “With affordability continuing to rise and household incomes not rising in lockstep with the cost of a home, this is becoming a more permanent, natural place in solving the housing crisis.”

Institutional capital is investing in the build-to-rent segment of the single-family rental market, and it’s this segment where Nolan is predicting an asset class comparable to the apartment sector. “I think that single-family rentals will become as prevalent as multifamily housing in the next 10 to 20 years. It really reminds me of when the multifamily sector took off in the 90s,” she says. “That is what we are seeing today.”

Nolan also sees a future where institutional capital is a staple fixture in the market. “The profile of the investor is becoming more institutional, and I think that is permanent. Institutional investors are very disciplined and defensive, and they are thoughtful in strategy,” says Nolan. “So, I don’t think this asset class has a short shelf life.”

However, it isn’t only institutional players that are turning their attention to the single-family housing market. Narrow yields and steep competition in the apartment sector have pushed many investors into the SFR market. “We are seeing new players and new capital sources leave other property sectors, like office, hotels and retail, and they want to invest in real estate because it is a good inflation hedge, but they like multifamily because of the strong fundamentals,” says Nolan. “Everyone needs a place to live, and we are undersupplied in relation to the demand characteristics.”

Currently, emerging secondary markets in the Sunbelt region have been the prime stomping ground for investment. Nolan says that is because these are markets with available land to develop build-to-rent communities. Berkadia has done deals in Arizona, Texas, Atlanta and Birmingham, Alabama. However, build-to-rent communities could be successful in any market, including primary markets—so long as there is land for development. “I think that there will be more creativity over time as long as developers or investors can find a way to invest in this product on a go-forward basis,” says Nolan. “It is all generated on if they can hit their target returns.”