$50B in Capital is Now Chasing the SFR Market

More than $50 billion in capital is flooding the red-hot single-family rental market, according to a new analysis from John Burns Real Estate Consulting. 

The sector is soaring thanks in large part to pandemic-induced disruptions in how we live and work, says John Burns’ Danielle Nguyen. By way of comparison, just $3 billion was targeted toward SFRs in 2020. That number ballooned to $45 billion in 2021, and $5 billion has already been committed to the sector so far this year alone. 

The estimated $50 billion John Burns is tracking translates into 125,000 homes at today’s median resale value of about $400,000, Nguyen says. But “since some of this is only the equity investment and excludes the debt (and we know of far more than this that is not public info), we believe the number of homes that could be built and/or purchased far exceeds this,” she says. 

Experts also say SFR and build-for-rent communities are appealing to investors looking for yield and a hedge against rapidly rising inflation. 

“Homes should be a hedge against inflation because the cost of their materials is rising while rents should grow along with inflation as well. Also, rental homes have been historically less volatile during housing booms and busts,” Nguyen says. 

The largest 20 single-family rental markets in the US have also seen rents rise faster than non-SFR homes, with a 10% increase year over year (as opposed to the national average of 4.6% rent growth for non-SFR properties). Phoenix has enjoyed 12% rent growth in the space, followed by Charlotte and Las Vegas at 11 and Atlanta and Jacksonville at 10%.

The SFR market is dominated by three key demographics of renters: millennials on the cusp of parenthood, office workers looking for more WFH space, and aging baby boomers, according to research from MetLife. Debt in the space has become “a tale of two markets,” as large institutions, family offices, and smaller private equity firms are pouring capital into construction. The same goes for mid-market funds and high net worth individuals. But while institutional sponsors aren’t having any trouble securing debt “middle market investors are facing difficulty due to the lack of banks active in the space,” says Keaton Merrell, managing director, Capital Markets at Walker & Dunlop.

Brad Hunter, president of Hunter Housing Economics previously told GlobeSt that he thinks the sector could pump out 150,000 units annually within the next five years.

 “Demand is outstripping the industry’s current ability to produce housing for rent,” Hunter said. “We see this in the rapid lease-ups, the high occupancy rates, the rapid rise in rents, and in the underlying household formation rates. More capital is needed for the years ahead to sustain this trend. I think there will be a 20% increase in BFR production this year, and a similar type of increase the year after.”

Within the build-to-rent market, a subsector of new construction single-family rental communities, a multifamily hybrid product is the most popular. “Some multifamily developers and investors are adopting a hybrid form of development, known as horizontal multifamily,” says Hunter. “This is the fastest-growing segment within the built for rent sector, and it is being met with tremendous demand.”