“The single-family rental sector is having its moment,” Arbor said in its newly-released Q3 2020 Single-Family Rental Investment Trends Report. The pandemic could have either disrupted the single-family housing momentum by hampering rents and migration, or—as it actually happened—boosted outward migration and demand for single-family homes. Rent collections have remained stable, new demand has hit generational records and rents have seen upward pressure, according to the report, all good news for the future of the single-family rental market.
In the third quarter of 2020, single-family rentals had an average 95.3% occupancy rating, a 100 basis point increase from the first quarter of the year. This is the highest occupancy rate since 1994 for single-family rentals.
This demand could lead to a shortage of single-family rental homes. However, recently investors and developers have showed a renewed commitment to operating and developing these properties. Invitation Homes and Rockpoint Group recently formed a $1 billion joint venture to acquire and operate single-family rentals in the Western US, Southeast US, Florida and Texas. Through the joint venture, Invitation Homes will provide investment, asset management and property management services. In addition, RangeWater just launched an $800 million platform to build and operate single-family rental communities in the sunbelt region.
RangeWater Real Estate’s platform is a build-to-rent play, which is becoming a defining feature of the single-family rental market. Arbor, however, notes that this is still an experimental phase for the growing market as operators figure out what renters want. This will also give renters a wide variety of options. Still, single-family rental starts totaled 40,000 units in the last 12 months. While down slightly from pre-pandemic levels, it shows the activity in the market.
This surge in demand has also put upward pressure on rental rates for the asset class. Typically, single-family rentals are very seasonal with the rental season running through spring and fizzling out in the summer. The pandemic pushed that trend back, but when rental season started in July, rents on single-family homes were up 6.5% on vacant-to-occupied units. This is the highest increase in four years.
Demand isn’t the only reason that investors are flocking to the sector. Single-family rentals offer an 6% to 8% cap rate, much higher than a typical apartment investment. In the third quarter of the year, however, new investment demand compressed cap rates to an average of 6.5%. This has brought the spread between single-family and apartments down to 1.4%.
Overall, Arbor’s report had a positive outlook on the sector, saying that the asset class was the best positioned to grow through the pandemic. However, it also warned that landlords still have hurdles ahead in terms of rent collections and the ongoing pandemic that has hurt the economy.