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July 2019

Momentum building for B2R

July 8, 2019

"There is a consumer rental demand that is driving these institutions to want much greater levels of inventory of this product," said Gerald Ellenburg, CEO of ERC Homebuilders, in an interview with CNBC. "They are learning or have learned that new inventory is a much safer and more official rental product."

"The single-family rental (SFR) space has quickly quieted skeptics and scaled into an institutional asset class," wrote Don Walker and Rick Palacios Jr., principals at John Burns Real Estate Consulting.

Figures from the National Association of Home Builders illustrate the growth. In 2017, 37,000 homes were built as rentals. In 2017, it grew 16 percent, to 43,000, account for just under 5 percent of total single-family housing starts. "That's just homes built and held by builders for rent and doesn't include those sold directly to investors, so the number are likely larger and growing more quickly," observed one analyst.

A VP at a Phoenix-based commercial brokerage firm reported having clients looking to acquire 5,000-to-6,000 homes in the next two years. He suggests demand is growing in part because the "huge millennial generation" is aging into marriage and parenthood, but not all of them want nor can they afford to buy a home.

AHV Communities, which calls itself as the premier developer and builder of single family rental communities, and whose experience includes 15 developments encompassing more than 2,500 homes, describes its vision as "Creating the new American Dream. The smart new paradigm in rental living."

"It's a great alternative to apartment living and homeownership," says Mark Wolf, CEO and founder of California-based AHV Communities, "A lot of people want to be mobile. They don't want to be saddled with mortgage debt, and they want to live maintenance-free."

A single-family home offers more space and privacy, with a backyard, attached garage, and other features not available in multifamily housing, added Gene Kim, a VP at AHV Communities.

Research by John Burns Real Estate Consulting indicates strong ROI in the B2R space, noting product niches and service levels with each subcategory of single-family rentals have proven successful by multiple measures:

  • Quick lease-up periods, ranging from 10 to 30+ units per month (average of 14);
  • 91% to 100% stabilized occupancy rates (average of 96%);
  • Significant rent premiums, ranging from 15% to 30% above equivalent-sized apartments or "one-off" SFR homes located in traditional for-sale neighborhoods.

Burns' research shows rents for single family (growing at 4.5% annually) are outpacing rent growth for multifamily (3%). The firm also reported finding much less turnover in single-family rentals, and much less volatility in the rental market than the home sales market.

In the same report, Walker and Palacios stressed the importance of being mindful of demographics and design elements. "To be clear, B2R does not work in every market and in every situation. Understanding local demographics, proximity to retail and good schools, walk scores, and market feasibility all remain essential. Our B2R community visits also found product and design elements critical, both from an operator cost savings and consumer preference perspective.

After visiting 50 open and planned B2R communities consisting of more than 6,000 homes and analyzing amenities at various communities, researchers from Burns believe the segment will continue to grow. "It's a trend that is projected to continue as consumers struggle with higher interest rates, higher home prices, and a limited supply of homes for sale. Or simply prefer to rent."