SFR Occupancy Is At Its Highest Point In Two Decades

Occupancy of single-family rental space is at its highest point in more than two decades, with current occupiers predicted to remain renters for longer against a backdrop of rising mortgage rates.

That demand has amplified investor interest in the sector, according to new research from JLL. SFR as an asset class is currently dominated by mom-and-pop investors, with institutional money accounting for just three to four percent of all supply in the United States. 

 According to John Burns Real Estate Consulting, owning an entry-level home is now $419 more expensive on a monthly basis than renting, the widest gap since 2007. But SFR rents are also ticking up as demand increases, with rents pushing up 5.5% year over year in the fourth quarter of 2021. John Burns predicts rent growth of 5% in 2022 and 4% in 2023.

JLL experts call the sector a “defensive investment opportunity” in today’s inflationary environment.

“The shortages in existing supply and strong SFR demand trends have raised investor interest in the build-to-rent space of SFR specifically,” said Managing Director Matthew Putterman, who co-leads the SFR team within JLL’s Capital Markets group. “Investors are seeing the sector’s sustained rent growth as a result of the high occupancy and its overall use as a hedge against inflation within their portfolio.”

Earlier this year, Magnolia Capital announced a joint venture with Principal Real Estate Investors to pursue the SFR space, with the goal of acquiring 1000 or more homes per year. Chicago-based asset manager Monroe Capital also committed $250 million in debt and equity to invest through Second Avenue, which builds and manages single- family rental portfolios for institutional investors who wish to take a more passive role in SFR investing.  Other major data points of note in the institutional space include Blackstone Group’s acquisition of Home Partners of America, which transacted at an estimated mid-3% nominal cap rate, and Brookfield Asset Management’s recent $200 million raise Brookfield Single-Family Rental, which will acquire and renovate homes. 

Since 2005, SFR home supply has grown by 3.5 million and currently stands at 14.8 million total homes nationally, or 10.4% of all housing units. They are most prevalent in Midwestern states, where penetration surpassed 47%, and in states like Texas, which sits at 34% penetration. Other Sun Belt markets are seeing SFR stock edge to between 40% and 50% of overall rental stock, according to JLL.

Gross SFR yields in the first quarter hit 6.4%, hitting the 11th consecutive year of compression.

“This phenomenon has been supported by rapid home value appreciation coupled with strong rental growth,” the report notes. “The sector is poised to see strong cap rate fundamentals versus other property sectors as rent growth and occupancy remain strong due to favorable supply/ demand imbalance.”