Bulwarked by strong demand from renters, rising rents and some constraints on existing supply, single-family rentals (SFR) in recent years rapidly emerged to become a popular investment among private equity real estate investors, publicly-traded and non-traded REITs and individual investors. And despite some broad macroeconomic headwinds, players remain optimistic about the sector according to WMRE’s third market study on the segment.
Research on the sector was previously conducted in 2019 and in the midst of the pandemic in 2020. The survey was not fielded in 2021.
Roughly one-in-six respondents (15.6 percent) reported that average cap rates in their markets are now below 4.5 percent on SFR assets. This represents the highest level in the survey’s history and a rise of 6.6 percentage points from the 2020 survey. In all, respondents pegged SFR cap rates at 5.6 percent—down from 5.9 percent in 2020.
But, as is the case more broadly among all property types, respondents do expect cap rates to rise, especially given the signal that the Federal Reserve Chairman plans to aggressively raise the target for the Federal Funds Rate throughout 2022. In all, 77.7 percent of respondents said that they expect cap rates on SFR assets to rise in the next 12 months while only 19.7 percent expect them to decrease.
When it comes to occupancy rates, more than four-fifths of respondents (81.4 percent) said they expect occupancy levels to increase in the next 12 months. (In 2020, for comparison, the figure was just 59 percent.) Only 15.2 percent of respondents expect vacancies to increase in the sector in the next year.
In addition. 45.7 percent of respondents said they expect demand to rise while 32.5 percent said it will remain flat and only 15.6 percent said it will fall.
Most respondents (58.0 percent) say they plan to hold onto SFR assets or buy more (29.0 percent), while those who plan to sell assets are in the minority at 12.0 percent. Respondents, however, are unsure of what will happen with investment sales volume for the segment with roughly an even split between whether volume will rise, fall or remain flat. Overall, one-third of respondents (33.3 percent) said SFR sales volume will rise. Another 25.5 percent said volume will fall and 29.2 percent said it will stay flat. In addition, 11.9 percent said they were unsure.
Nearly half of respondents (48 percent) said they are seeing competition from new investors when trying to acquire SFR properties. Institutional investors (52 percent) were the most frequently mentioned investor class among new competitors followed by large private equity funds (50 percent), small private real estate investors (44 percent), individual investors (31 percent), publicly-traded REITs (22 percent), non-traded REITs (17 percent) and international investors (16 percent).
The view on capital markets was also evenly divided. In all, 31.7 percent of respondents said that equity is more widely available than it was a year ago while 30.8 percent said the level of equity was unchanged and 30.4 percent said it was less available than 12 months ago. Responses were similar on debt, with 24.7 percent saying debt is more available than a year ago, 33.9 percent saying access to debt is unchanged and 30.1 percent say it has been less accessible. In addition, more than three-fourths of respondents (76.3 percent) said they expect loan terms to tighten in the next year.
On the development front, most respondents think there is either too little (33.7 percent) or the right amount (30.5 percent) of build-to-rent construction taking place. Only 17.7 percent said there is too much product in the pipeline in their region with an additional 18.1 percent saying they were “unsure” how they would characterize the level of development. In addition, only 10.3 percent of respondents said there are too many properties relative to the number of renters while 23.5 percent said there are the right amount of properties and 56.8 percent said there are too few properties.
The full version of SFR market research will be published later this year.
Survey methodology: The WMRE research report on the single-family rental sector was completed via online surveys distributed to readers of WMRE in April and May 2022. The survey yielded 245 qualified responses with the vast majority at the executive level of vice president or higher. Respondents included a broad cross-section of industry participants of owners, developers, brokers and lenders. Private investors represented the largest group at 40 percent. Survey respondents are active nationally, with the biggest percentages operating in the East at 44 percent, South/Southeast/Southwest at 35 percent, West/ Mountain/Pacific at 36 percent and Midwest/East-West North Central at 27 percent.