One of the most compelling rental market trends of the last two years has been the surge in interest in single-family rentals and suburban living. Though the pandemic has brought this trend to the forefront, the conditions behind the trend had been shifting into place throughout the previous decade.
2023 Property Management Industry Report
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In this post, we’ll seek to answer the following questions:
- What’s the single-family rental market opportunity for property managers?
- How and when did single-family rental properties become so popular?
- Will the current level of demand for single-family rentals last?
- Who are the major players in the single-family rental industry?
- How can property managers stay competitive as institutional investors pour into the space?
How We Got Here: A Short History of the Single-Family Rental Market
The Rise of Single-Family Rentals Following the Subprime Mortgage Crisis
In the aftermath of the subprime mortgage crisis of 2007-2010, many families who lost their homes to foreclosure turned to renting as they began the process of repairing their finances and credit history. Meanwhile, tens of thousands of homes lost to foreclosure were packaged together and purchased by institutional single-family rental aggregators. Other single-family homes were rented out by homeowners who found themselves underwater on their mortgages, and needed to wait for their property to regain its value before they could sell.
All in all, 3.5 million single-family homes were transitioned from owner-occupied housing to rental housing between 2006 and 2016. By 2017, families represented 1 in 3 renter households, and 84% of new families with kids entering the rental market had moved into single-family properties. But developers’ attention was focused on the opportunity to build multifamily apartments to accommodate the nationwide rise in renting and target high-income renters—one of the fastest-growing renter segments following the Great Recession. By the close of the decade, it appeared that luxury apartment communities targeting lifestyle renters with disposable incomes had been overbuilt due to their profitability for developers, while properties targeting the much larger population of families renting their homes out of financial necessity had been under-built.
The Increase in Demand for Single-Family Rentals During the Pandemic
When the pandemic hit in the early months of 2020, renters’ and homebuyers’ willingness to move out of their current homes was suppressed by safety concerns and the shutdown of many local markets. But once residents felt comfortable moving around, their increase in desire for additional living space was swift and voracious. Renters and homebuyers alike wanted to live in single-family properties that would give them extra room for remote work, learning, exercise, and other activities; as well as the ability to spend time in their own backyards. Suddenly, suburban neighborhoods and secondary markets that had attracted fewer renters and apartment developers than downtown neighborhoods and primary markets following the Great Recession held new appeal, particularly with remote work enabling some residents to move further away from city centers.
To share two meaningful single-family rental statistics from the 2022 Property Management Industry Report: In the population of renters that we survey each year, the number who live in single-family rental properties has been on the rise for several years now, and currently stands at 37%. This represents an increase of 5 percentage points since 2018, mirrored by a slight decrease in the number of renters living in multifamily homes and apartment buildings. In addition, we’ve seen an increase in the number of renters choosing the suburbs over the city: In 2018, the same number of renters lived in urban and suburban neighborhoods; and now, there’s a 10-point gap between them.
Prior to the pandemic, the availability of starter homes that a majority of prospective buyers could afford was already perilously low. Millennials entering their prime homebuying years were finding that expensive home prices, stagnant wage growth, student debt, and high rents often prevented them from saving up enough for a down payment, particularly for homes within commuting distance of major cities. But with the pandemic suddenly increasing the competition for homes—and pandemic conditions and low interest rates motivating buyers to act right away—the supply-and-demand imbalance drove home prices to feverish levels across the country. This has contributed to the number of residents making their homes in single-family rentals when they’re unwilling or unable to take on an expensive mortgage.
All of these factors led to an increase in demand for single-family rentals that began prior to the pandemic, but that has greatly accelerated over the last 18 months. Current demographic trends, as well as the ongoing affordable housing shortage, indicate that demand for single-family rentals will remain strong. We’ll dig into the details of this topic in the next section.
Will Single-Family Rental Demand Continue?
How Demographics Will Impact Future Demand for Single-Family Rentals
Single-family rentals appear poised to meet the needs of many different renter demographics in the years to come; and in particular, they fill a critical void of starter homes for young couples and families. With people of all ages finding themselves shut out of the competitive housing market, they’re on the hunt for rentals that can accommodate their evolving needs and preferences, and may remain in the rental market for longer than previous generations.
Millennials and Baby Boomers are the two largest living generations, and both are approaching ages where their housing needs are likely to change. As Millennials enter their thirties and forties, they’re putting new demands on their spaces, whether they’re working remotely or welcoming partners, kids, pets, or relatives into their households. And with most Baby Boomers now in their sixties and seventies, they may be thinking of downsizing to a home where they can comfortably age in place and enjoy their retirement years without the stress of mortgage payments and property maintenance.
Single-family rentals are also an important option for renters in transitional phases of their lives, whether they’re going through a divorce or need to test out a new area before they’re ready to buy a home of their own. These properties’ private yards and extra space make them appealing to pet owners, too. And the lifestyle renters who appreciate the flexibility and access to amenities that renting can provide may have their eye on build-to-rent communities, now that the pandemic has increased their interest in single-family rentals and suburban living.
Increasing Interest in Build-to-Rent Communities
Build-to-rent communities (also known as build-for-rent communities) are the most recent development in the single-family rental sector, serving as a major driver of the asset class’ current success. So, what are they? Build-to-rent properties are contiguous homes developed for the sole purpose of being rented out. They’re often located in low-density, master-planned, amenity-rich communities. They most often consist of detached or attached single-family homes, but can also take the form of horizontal multifamily homes, which offer single-story living with smaller units than traditional single-family properties, and are arranged in denser clusters.
Single-family rentals in build-to-rent communities stand in contrast with single-family rentals owned by aggregators and individual investors, which are formerly owner-occupied homes scattered throughout existing neighborhoods. Unlike standalone single-family properties, build-to-rent communities are financed and managed in much the same way that multifamily communities are, making them much more accessible to institutional investors. With more and more build-to-rent communities coming online in markets across the country, the dynamics of demand within the single-family rental market are likely to change.
What the Influx of Institutional Investors into the Single-Family Rental Market Means for Property Managers
Just as institutional investors came to see multifamily rentals as a solid investment in the 1990s, single-family rentals have begun to attract institutional funds at similar levels. In fact, real estate lender Walker & Dunlop recently estimated the size of the single-family asset class (at $3.4 trillion as of mid-2021) at nearly the same size as the multifamily sector ($3.5 trillion). They also project that single-family rent growth will outpace all other asset classes—including multifamily—in 2022.
As a result of the influx of investment dollars into the single-family rental market, property managers who focus primarily on small rental properties are feeling the pressure of increased competition from larger firms and institutional investors—both those who buy up and manage existing single-family properties, and those who develop and run build-to-rent communities.
In order to understand the threat that industry consolidation and institutional investment may or may not present to property management companies, it’s important to examine each of the different parties at play through the perspective of their approximate share of the market.
Small-Portfolio Landlords & Individual Investors
Individual investors own an estimated 97% of existing single-family rentals in the U.S. today. It’s undeniable: The vast majority of rental properties are still under the ownership of the small-portfolio investors and “mom and pop” landlords who have always comprised property managers’ client base, though the balance is shifting from Accidental Landlords to Intentional Investors. And with financial challenges and regulations on the rental market having wreaked havoc for small-portfolio rental owners during the pandemic, this group will continue to seek the assistance of knowledgeable, personable property management experts in their communities. (We talk about this in much greater detail in the 2022 Industry Report.)
Build-to-Rent Community Developers & Investors
Build-to-rent-focused developers, homebuilders, investors, and REITs are behind 5 to 10% of new single-family homes that are being built today. These communities represent a new source of competition for existing suburban rental properties, particularly those in older or less-well-maintained communities with fewer amenities. But because they’re generally managed by the firms who develop them, they don’t represent a direct source of competition for property managers, though they do represent a growing (but small) share of the single-family rental market that is unavailable to property managers looking to expand their portfolios.
Institutional Single-Family Rental Aggregators
Institutional single-family rental aggregators, who acquired the bulk of their properties following the subprime mortgage crisis, are estimated to own less than 3% of existing single-family rental homes. Industry consolidation and institutional investment continue to put pressure on single-family property managers. In this year’s Industry Survey, a property manager in the Sacramento area explained that the pandemic “increased the number of properties held by a small group of large players.” Because larger firms can generally offer economies of scale that smaller businesses can’t, it can certainly be hard for property management companies to compete on price.
But here’s the thing: Small and mid-sized property management companies are able to pivot more quickly in response to customer feedback and shifts in the market. They can provide the kind of personalized customer service and attention to detail that large firms simply can’t. And this is exactly what they’ve done throughout the pandemic, proving the continued value of their expertise in rental operations, local market conditions, regulatory compliance, collections, and resident retention within the single-family rental market.
The 2022 State of the Property Management Industry Report
This year’s State of the Property Management Industry Report digs into the successes and challenges that property managers with small rental properties in their portfolios have experienced over the last year, as well as the opportunities and difficulties that they foresee for the industry in the years to come. Download your free copy of the report now to learn the strategies that property management companies just like yours are using to run and grow their businesses in the current environment.Read more on Industry Intel