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20 May 2024

High Interest Rates, Low Supply Keep Outlook Strong For SFR

High Interest Rates, Low Supply Keep Outlook Strong For SFR

With the likely persistence of higher interest rates and a significant lack of housing supply keeping the cost of home-buying up, single-family rentals appear likely to maintain an important position in the real estate landscape for the foreseeable future, speakers said Monday as industry players gathered for a conference in Miami Beach, Florida.

four people onstage at a panel, with a sign that reads 'SINGLE FAMILY RENTAL FORUM'Single-family rentals, or SFR as the term is commonly shortened, have not been free of their own challenges, including construction and capital obstacles slowing the development of new build-for-rent product, skyrocketing property insurance costs, and the threat of federal regulation. But experts, including investors, lenders, operators and property managers, at Information Management Network's Single Family Rental Forum (East) said there are reasons to expect this sector to continue to be an attractive business and one that could actually help address the housing affordability crisis, despite criticism that SFR portfolio owners have crowded out entry-level buyers.

In the conference's opening remarks, Jeff Cline, executive director and principal of private real estate investment firm SVN SFRhub Marketplace, highlighted research by his firm and John Burns Research & Consulting that showed mortgage payments for entry-level homebuyers increased on average 9% nationally year-over-year as of February, compared to a 4% increase in the new-lease asking rent for a single-family rental home.

Renting has also been less expensive than homeownership in 17 of the last 24 years, Cline added.

Meanwhile, from a business standpoint, while SFR held mostly steady with its asking rents down only slightly from the previous year's 5% increase, apartment rent growth increased only 1% compared to 4% in the previous year, Cline said.

During an opening panel looking at the state of the SFR industry, Doug Dale, co-founder and executive vice president at property management firm HomeRiver Group, said that as the Federal Reserve recently indicated it will be holding off on expected interest rate cuts, his firm saw drastic increases in leasing applications. Average credit scores from applicants also jumped 20 points higher, possibly indicating more potential homebuyers are changing their plans and moving into the rental market, at least in the short term, he added.

"Our view is that while the market is basically in a steady state and inventory is going to remain tight, what we could be seeing is because the view of interest rates for potential homebuyers is changing, they're thinking now is not a good time to buy," he said.

Transactions among SFR investors have been very slow, speakers said, but the reality of a "higher for longer" interest rate environment setting in has led some sellers who were waiting for rates to drop to reconsider their plans, said Gary Beasley, CEO and co-founder of Roofstock, which provides data for SFR transactions. That has resulted in some SFR properties trading to better-capitalized sponsors looking for portfolio opportunities, he said.

Slower periods also mean that some reinvention is going to be needed for some businesses, Beasley said, noting, "What got us here isn't going to get us to the next milestone."

During the opening panel, he and Doug Brien, co-founder and CEO of property management firm Mynd, discussed the just-announced merger of their companies, which they said brings together Roofstock's transactional strengths with Mynd's property management technology, making it a good fit.

Looking at where future SFR inventory will come from, Beasley noted there is not the large foreclosure market that fueled early growth around 2009. Instead, speakers said there will likely be some smaller operators selling to larger ones, but they expect build-for-rent will be the major focus.

"That's really the only game in town right now," said Fred Matera, co-head of rental portfolio lender CoreVest Finance, noting there are about 45,000 build-for-rent units under construction, mostly in the Sun Belt, up from about 27,000 units in 2023 and about 7,000 units in 2020.

"It's really growing pretty vertically. New construction, purpose-built for rent — it's hitting the demographics, it's hitting the real need, which is new supply. People want new. People want to rent. That's what they can afford."

Speakers on another panel focused on the build-for-rent segment said that they have been focused on navigating a challenging lending market the past few years, but they are seeing increased stability and the pull-back from banks and other traditional lenders has had the silver lining of attracting new sources of capital to the sector, including pension funds and institutional money managers.

Figuring out the right product for a site's particular submarket and location is also critical for build-to-rent projects, several speakers said.

SVN SFRhub's director of build-for-rent, Audrey Carlson, noted a lack of 3-bedroom and 4-bedroom options, which could grow more popular as millennials with growing families look to move up.

"At the end of the day, there is a housing shortage," said Lance Calhoun, director of multifamily and build-to-rent for HomeRiver Group. "It's not necessarily if you build it, they will come. If you build the right thing, then they're definitely going to beat your door down."

Another major issue that came up in multiple sessions was the rising cost of insurance.

"Whether you believe in human-caused climate change or not, it's affecting insurance costs big time and will continue to. So, ignore at your own peril," Roofstock's Beasley said. "Clearly the insurance issue should be top of mind for all of us."

He and other speakers said they are hopeful insurance reforms are improving some state markets. They also suggested seeking out markets that are less at risk from climate change effects and said savings of as much as 30% to 40% can be realized by negotiating packaged coverage across diversified portfolios.

Another major risk looming over the SFR industry has been the potential for federal regulation in response to concerns that corporate buyers are hurting individual homebuyers.

But several speakers said they think the SFR sector can be part of the solution to the housing affordability crisis, including the potential for build-to-rent to contribute new supply.

"We often get the fingers pointed at us like the villains in this scenario," Brien said. "But really, fundamentally, it's a supply problem, and it's exciting that as an industry we are now creating the supply for American families and giving them a choice as to whether they want to buy a house or rent a house, a new house."


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