The Post-COVID Gift Horse: Single Family Rentals

Like a lot of people, I’ve been watching the real estate market closely as it’s shifted throughout the ongoing COVID-19 pandemic. In the beginning, it was tempting to make those calls on how the market would react to the changes that the crisis would bring. Now, with a lot of concrete observation, we can better understand the forces and phenomena that have contributed to the strength of certain sectors.
And among the best performing sectors has been the single-family rental market, which has demonstrated some head-turning rental growth within the past many months. Beyond rental growth, the sector has shown competitive NOI margins and operating numbers that have flown past some of the comparable multifamily metrics. In my opinion, we have every reason to believe that single family rentals will be an important sub-sector to investors looking forward into the post-COVID era. Below are a few important reasons why.

The Single Family Rental Market: Reading Between Trend Lines

Only after the Global Financial Crisis did the single-family rental sector see real institutional capital and professional infrastructure. Until then, single family rentals were mostly the result of owner-landlords and mom-and-pop operations, where tenant interactions were highly direct and rentals were managed at a much more personal scale.
But as the sector has matured, the attributes that make it highly dynamic and resilient have become increasingly clear. With the proper demand, the sector is an investor’s dream—as it stands, it’s highly fragmented, and there is still a lower-than-average institutional presence. Investors therefore have a great opportunity to realize the benefits of consolidating a portfolio and beginning to scale within the single-family rental space.
Those prospective investors can be well-assured that the demand for single family rentals will almost certainly continue and could potentially increase. A look at the relevant demographic trends is more than enough reassurance.

The Post-COVID Family

Consistently, the average age of marriage for men and women has been on a steep incline since the early 1950s. Today, men are at an average age of 30 when they first marry, and women are close behind at 28. And marriage plays a significant role in the homeownership equation; according to the US Census relayed in a report by UBS, the percentage of people who owned homes under the age of 35 was just under 40%.
Interestingly, more data from UBS indicates that the average age of a single-family rental tenant is between 35 and 40 years old. In the next 15 years, the number of people in the 30-49 year old age group will increase by roughly 10 million. Behind them, an additional 45.1 million people, currently aged 20-29, will be stepping in to fill the single-family renter role.

Single Family Rentals vs Homeownership

Working from home has certainly placed new demands on ‘home.’ Many families have rushed to secure a property in a competitive market, hoping for a quick uptick in equity and unsure when the boom will come back down. But the same conditions have pushed the concept of homeownership farther away for other buyers. While home prices rose to new heights, individual and families everywhere felt the financial setbacks of the pandemic.  

So, while interest rates might make monthly home payments attractive, the wealth accumulation needed for down payments, closing costs, and repair funds has been put under COVID-related duress. The following figure included in the UBS report shows home price as a multiple of household income across the last three decades. Clearly, the spike in home prices combined with the pandemic has driven that multiple upward. 

Purpose Driven Development - An Investor’s Cue

In the same UBS report, the analysts predict an increase in the development of and investing in single-family homes built specifically to rent. Considering the above demographic shifts, and the increasingly complex homeownership equation, renting is likely to continue to take up a significant part of the market. Still, the ongoing remote work movement is making the space afforded by a single-family rental more desirable, and tenants who are further along in their careers and family lives will likely opt for single family homes over multifamily units. It seems to be the perfect storm for purpose-driven development within the single-family rental sector. And we might have already seen that uptick begin.

The following chart shows two contrasting lines, the total single family starts from 1974 onward, and the total number of those starts that were built specifically for rent. A clear upward trend can be seen in the tan line, which represents the latter category. Investors who might have interest in scalable development projects might find this a promising point of entry.
It’s hard to know anything for sure in a changing market, but the case for sustained strength in the single-family rental sub-sector seems as strong as any. For post-COVID investors, the opportunity here seems clear—and it’s always the good deals we don’t take that haunt us more than any bad ones we do.