Author: Jeff Coyne, Senior Vice President with GRS Group, an NV5 Company
Since housing is always a key driver in our economy, a new form of commercially financed housing has been making serious strides. Single family rentals (SFR) and/or build to rent communities are outpacing the growth and profitability of all other asset classes including office, apartments, retail and industrial.
What is SFR housing or build-to-rent communities? SFR means a single-family home which may be occupied by 2 or more single persons consisting of common space and for facilities for group use by the occupants of the unit. A SFR community is one in which residents live in a community of single-family rental homes without “any of the hassles or expenses” of homeownership. As renters look for a lifestyle change that offers more space and privacy, communities of single-family houses built for the purpose of renting have become a rapidly growing Commercial Real Estate (CRE) space. Twice as many homes now under construction are now developed specifically for rental use, not for sale.
To date, the biggest issues for the successful development of SFRs have included building the pipeline for new developments, supply chain-related concerns, and extremely high land costs. For deals in the pipeline, cities are understaffed and overwhelmed, leading to issues with keeping projects on track and getting approvals and entitlements to begin new ones. While construction costs are beginning to trend down, a significant current supply chain issue is related to acquiring transformers. Also, despite high land costs, potential rent contraction is forecasted in the near team over concerns related to ongoing inflation and rising interest rates.
Additional potential growing issues come from pockets of community resistance to build-to-rent communities created and funded by institutional investors. Some big-name firms in the space are getting pushback by some communities who are voicing a narrative that institutional investors are “threatening the American dream” of homeownership. Others are advocating instead for higher density developments as opposed to a “horizontal multifamily” approach, which some consider inefficient from a land-use perspective. While this pushback is gaining traction, nationally SFR only makes up less than well below a tenth of one percent of housing.
Proponents of SFR note that the U.S. is grossly under-housed, and myriad options are needed. This community of renters is expected to widen as supply and knowledge of the sector increases. As working from home becomes more common, SFR offers a great option to perspective renters as an alternative to the traditional apartment.
From a financing perspective, agency lenders (Fannie Mae and Freddie Mac) will fund these projects as they do with traditional apartment communities. In addition, since some banks and insurance companies will lend on this product as well, traditional homebuilders and apartment community developers are interested in expanding their portfolios into this space. However, given all the unknowns, pricing for loans and insurance still varies widely. Nevertheless, information to make better determinations continues to improve amid growing interest.