Where Does Institutional SFR Growth Go From Here?

For many reasons, institutional investment in single-family rental homes was on a tear, expanding in markets nationwide as potential homebuyers accepted the idea of renting when they couldn’t afford high mortgage rates, couldn’t find a suitable home or didn’t have the funds for a down payment. Renting a home with more space than an apartment, with its own yard and sometimes a shared clubhouse was the next-best choice, and institutional developers were eager to meet their needs. 

But now many of these participants are scaling back so they can focus on improving their operational efficiencies to survive and thrive over the long term, according to Yardi Matrix. Exactly where does this segment stand as it regroups/? Institutional SFR investors own about 600,000 SFRs units or 3% of the 17 million single-family rental homes and a small fraction of the 82 million occupied single-family homes. They’re found in both scattered-site properties—homes acquired individually—and SFR communities, most built as rentals.

To date this year, institutional purchases have dropped as home sales declined. The segment’s activity for now is concentrated in BTR communities and new construction. As a result, future growth is expected to depend on what happens to interest rates, home prices and investor demand for commercial property specialized products like this. 

As of mid-year, 2023, the average SFR rent was up 27.9% since January of 2020 and 39.8% since 2018. Rents increased by $350 or 20.2% in 2021 and 2022 combined with year-over-year growth peaking at 15% in 2022’s first quarter. So far this year, rent increases have slowed, up $23 in the year’s first half while YoY growth decelerated to 1.3%. But there are locations with stronger YoY growth, which include Nashville at 21.3%, Baltimore at 13.3%, Chicago at 11.1%, Pittsburgh at 10.7% and Philadelphia at 8.3%. Numbers were weaker in Orlando at -20.9%, Miami at -8.6% and the Inland Empire at -4%.

But rents per square foot are another key indicator and in 27 of the 34 largest institutional SFR markets, units had higher rents per square foot than suburban multifamily properties. The differential was largest in cities like San Francisco, Orlando, San Diego and Raleigh-Durham. Moreover, in only six of these 34 metros did SFRs yield less revenue per square foot than suburban multifamily units.

Another indication of strong demand are the high occupancy rates. Since January 2019, the SFR occupancy rate has ranged between 95.7% and 97.2%. In July of this year, it hit 95.8%, down 30 basis points YoY but still a solid number that bodes well for the segment.