SFRs Gain Economic Ground on Multifamily

A new report on single-family rentals by Cushman & Wakefield suggests shifting market realities may be calling for investors to reconsider how they balance their CRE portfolios.

According to the firm, there are some large ongoing changes in the SFR market. One is location. The SFR and build-to-rent markets have been expanding. Currently, 77% of SFR inventory is held within four states: Arizona, Florida, Georgia, and Texas.

That shouldn’t be surprising given the demographic shifts from various parts of the country to the Sun Belt. Whether retail or multifamily—or SFR, apparently—real estate demand and, therefore, investment follows where people go. In addition, there’s a growing market of BTR in Michigan, Ohio, and Kansas.

People need a place to live and SFR and BTR are good solutions that also provide a “highly-targeted set of in-unit and community features,” such as private yards for pets, direct access garages, parking, and pools that attract renters, given that the terms are the most searched for amenities in the category.

Something that might seem odd at the surface is the report’s observation that SFRs have an operational financial advantage over multifamilies in staffing. Cushman & Wakefield says that staffing costs for SFRs can be upwards of 25% less expensive than traditional multifamily and that “evolving technologies will also continue to increase efficiencies for centralized leasing and maintenance.”

Although the reasons weren’t directly addressed, many SFR agreements call for the renters to provide lawn mowing and, in northern climates, snowplowing. The tenants become staff to some degree.

Contracts for heat and hot water maintenance as well as minor improvement and repair can potentially provide a gain, using third party expertise only brought in when needed and not kept on salary. Additionally, in financing, aggregated groups of SFR units can gain the scale and credit profile of an apartment building.

Gaining that stature is becoming more commonplace. Over the last three years, average SFR community sizes have grown by 25%, from 72 to 90 homes. “As more capital flows into the sector, community sizes will continue to grow and provide investors the opportunity to scale,” the report says.

Both SFRs and BTRs in particular are “approaching cap rate parity with conventional multifamily,” says Cushman & Wakefield. Growing liquidity as investors continue to seek yield and alternative investments have pushed cap rate compression over the last two years, with average rates between 4% and 5%. The firm expects a further 25 to 50 basis point compression for 2021 new construction in desired locations.