Demographic trends should generally support strong single-family rental demand into the future and provide opportunities.

The single-family rental (SFR) market appears poised for continued growth, even amid concerns about a weakening economy and the potential for a market correction as early as 2020, or possibly even in 2021.

As of September 2019, the Federal Reserve has cut rates twice this year, amid concerns over a slowing job market and an inverted yield curve. Experts don’t believe housing will be the cause of the next recession, and SFRs are still going full steam ahead.

SFR Landscape

Although there’s been concern about a weakening housing market, a decline in mortgage rates during the second half of 2019 buoyed the industry and got homebuyers off the sidelines. In a survey sponsored by Zillow, a hundred real estate experts, economists and strategists surveyed in the second quarter forecast annual price growth at the end of 2019 to be 4.1% and 2.8% in 2020.

For the single-family rental market, abundant capital via private lenders has bolstered opportunities for real estate investors to grow their portfolios. It’s conceivable that interest in SFR investments could rise even further if stock market volatility continues.

“SFR underwriting appears balanced, as originators weigh recessionary timing concerns against the sector’s long-term positive outlook,” according to the second quarter 2019 Single-Family Rental Trends Report from Chandan Economics. “All else being equal, the SFR sector continues to benefit from institutional consolidation and economies of scale. Even if the economy begins to experience a slight slowdown, the SFR market should enjoy moderate-to-strong growth due to solid fundamentals.”

Investor interest in the single-family rental market has been driven largely by sustained rental growth and strong occupancy. U.S. single-family rents rose 2.9% year over year in June, according to the most recent data available from CoreLogic, a data and analytics company. Single-family rents have been on the rise since 2010, although during the past year they have moderated into the 2.9 to 3.2% range.

In another indication of stability, the average annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) analyzed by ATTOM Data during the first quarter of 2019 was 8.8%, up from an average of 8.7% in 2018.

Phoenix outpaced other metros in the most recent CoreLogic analysis of single-family rents with a 7.1% increase. Tucson (6.8%) and Las Vegas (5.8%) were close behind. Rents for lower-priced homes, those priced at 75% or less of a region’s median rent, increased faster than higher-priced housing, CoreLogic said.

ATTOM Data Solutions singled out Wayne County (Detroit), Michigan; Cuyahoga County (Cleveland), Ohio; Allegheny County (Pittsburgh), Pennsylvania; Milwaukee County, Wisconsin; and Marion County (Indianapolis), Indiana, as “SFR Growth” counties that have the potential for 2019 annual gross rental yields of 10% or higher.

SFR occupancy rates rose 0.6% to 93.4% in the second quarter of 2019, compared to 80% to 85% early in the financial crisis, according to the recent report from Chandon Economics.

2020 Trends 

The SFR market should continue to benefit from strong housing demand, growth in renting as a lifestyle choice, rising rents and abundant capital from private lenders. The following single-family rental trends likely will continue into 2020:

• Build-to-rent // This subset of the single-family rental market continues to expand. Investors have included large, well-known brands such as Toll Brothers and Lennar and smaller players. ERC Homebuilders of Tampa, Florida, launched a Florida-centric business earlier this year specifically to fill this niche.
• Technology // Private lenders have led the way during the past five to seven years with technology-rich online lending platforms geared to single-family rental and fix-and-flip investors. These lenders continue to innovate with new loan products geared specifically to investors and robust data analytics. Technology will continue to play an important role in the maturing SFR sector.
• Short-term rentals (STRs) // With the explosive growth of Airbnb and other online rental platforms, more real estate investors are tapping into this market. The segment has had some growing pains that have resulted in restrictions and outright bans in some cities. One of the biggest benefits of STRs is that they can produce higher returns than long-term rentals in the same market. Investors should keep close tabs on the increasingly hostile regulatory environment surrounding short-term rentals because it could impact their bottom line.
• Joint ventures // Institutional investors who got into SFRs by buying up foreclosures seven to 10 years ago are now joint venturing on large-scale build-to-rent communities. One of the latest examples is Tricon’s $450 million venture with the Arizona State Retirement System. A key focus of this partnership will be to target the development of single-family build-to-rent communities in U.S. Sun Belt markets.
• Creativity in housing stock // The lack of affordable housing presents numerous opportunities for real estate investors. Investors are increasing the affordable housing stock through creative methods such as rentable accessory dwelling units (ADUs). California and other states have reduced regulations surrounding ADUs to address the affordable housing crisis. Less red tape may make ADUs a more viable residential real estate investment option in California and other states. Multigenerational housing has also been growing in popularity, according to the Pew Research Center, and may present options for investors who can meet that demand.
• Millennials // The aging of the millennial generation should support robust demand for rental units  for years to come, according to the Joint Center for Housing Studies of Harvard University.

“Rental markets are basically stable despite the upturn in homeownership,” according to the 2019 The State of the Nation’s Housing report from JCHS. “Demand from higher-income households is still on the rise, and construction of rental housing picked up again last year after a slight dip.”

Single-family rental stock fell by more than 250,000 units in 2017, according to the report. Even with this sizable decline, single-family homes make up about a third of the national rental stock, or about 15.8 million units. JCHS believes most of the “losses” were homes that were converted to owner occupancy rather than homes that were permanently removed from the housing stock.

Looking to the Future

Going forward, demographic trends should generally support strong single-family rental demand into the future and provide opportunities to private lenders.

The Joint Center estimates  that renter household growth will total 4.2 million by 2028  if homeownership rates remain near their current levels. And even if the homeownership rate rises by 1.6 percentage points over the decade, renter household growth will still total at least 2.1 million, given expected increases in the  adult population, according to JCHS forecasting.

Stock market volatility during the second half of 2019, driven in part by trade wars, could also drive increased interest as investors seek out less volatility, higher yields or more diversity in their financial portfolios. Interest in real estate and SFRs specifically as an investment option will likely continue to attract the attention of many investors in 2021 and beyond.

In all, the future for SFRs looks bright, even with some headwinds facing the economy.