SFR Is Well-Positioned Even As Headwinds Persist

The burgeoning single-family rental sector is expected to hold up well this year despite mounting economic headwinds — but increasing operating costs do pose a concern for owners and developers in the space.

A Green Street report authored by John Pawlowski, head of the Residential team, finds that factors including strong demographics, “an affordable price point” and otherwise limited single family construction bodes well for the sector over the next five years, especially when compared to other asset classes within commercial real estate.

To wit: the 35 to 44-year-old population is expected to grow at a clip double that of the overall US average, and the Sun Belt — already home to many SFR communities with many more under construction or in the planning phase — is expected to see above-average growth from that demographic. Single-family rental developments are most prevalent in the South Atlantic region of the US, led by Florida, Texas and North Carolina, with nearly 45% of all properties securitized in CMBS in the Southeast region.

In addition, SFRs generally are perceived as resilient from a pricing perspective and “several factors point to a firm floor under SFR rents and values,” according to Green Street.

“Lower-price point properties (e.g., SFR, MH, B-quality apartments) generally hold up better during weak economic times,” the report states. “The affordability gap between owning and renting has blown out, in favor of renting and (there is) a dearth of starter-home construction.”

But on the flip side, increasing operating costs and cap-ex remain a concern.

“Following a few consecutive years of benign cost pressures, operating expenses grew in the high-single digit range YoY in ’22,” the Green Street analysis states.  ”Little relief is expected in the near-term for the main drivers of the increases – property tax and R&M. The jury is still out on the long-term trajectory of cap-ex, but the direction is likely higher as homes age and turnover increases.”

Political risks also bound for the sector, especially as regulation aimed at blunting institutional home buying proliferates.

Rising inventory among the SFR asset class is affecting rent growth, which has slowed for seven straight months, according to CoreLogic. Orlando is currently the top spot for SFR rental growth, followed by Miami.  As of November, single-family rentals climbed 7.5% year over year, its lowest figure since May 2021.