For investors seeking to diversify portfolios, build equity or secure a steady source of investment income, the real estate sector presents a myriad of options and opportunities. The increased interest I've observed in the single-family rental sector can be attributed in part to the recent volatility in the equity markets and the growing uncertainty around when the economic expansion will finally lose steam. Here are five real estate industry trends savvy investors need to be watching in 2019:
1. Build-to-rent properties in secondary and tertiary markets
The build-to-rent industry has expanded significantly over the past year, with traditional homebuilders and real estate investors becoming increasingly active in this space. Expect to see continued expansion in 2019, most likely in relatively affordable markets such as Atlanta, Charlotte, Houston and Phoenix where rental demand is strong and build-to-rent developments can deliver reasonable yields to investors. The factors I see driving migration toward these markets and away from expensive markets such as Northern and Southern California and the Northeast include high land prices, increasing labor and materials costs and arduous permitting policies in those regions.
2. Large capital partners entering joint ventures
This year holds robust opportunities for joint ventures in the real estate investment space. Joint ventures between REITS and other operators with large capital partners make sense for a variety of reasons, including an ability to get direct exposure to housing while not having to build their own platforms. For example, in 2018, Toronto-based real estate investment firm Tricon Capital Group announced (registration required) it was partnering with an Asian sovereign wealth fund and a large U.S. pension fund on a $750 million joint venture to invest in 10,000–12,000 single-family rental (SFR) homes.
REITs, in particular, are coming off of a strong year of mergers and acquisitions (M&A) activity, as they seek efficiencies that can come from increased scale and more efficient property and asset management. Expect to see them exploring joint venture opportunities as a new way to deploy capital and generate returns.
3. Retail investor interest in single-family rental homes
Speaking of single-family rentals, demand for these properties among retail investors continues to show strength, especially in the wake of stock market volatility. Since residential real estate returns tend to be uncorrelated with stocks, investment properties can act as a portfolio hedge against stock market risk. Compared to investing in equities (including using REITs to gain exposure to the real estate asset class), investment properties such as SFRs may offer advantages including the ability to choose your markets and amount of leverage, as well as the potential for higher dividends by owning the properties directly.
4. Renting as a lifestyle choice
According to Pew Research Center, as of 2016, only about 37% of millennials occupied homes they owned, whereas more than half of early baby boomers were homeowners by the same age. Highly educated workers are increasingly drawn to cities and central business districts, where they tend to rent rather than buy homes in the suburbs. While it’s easy to blame falling rates of homeownership on lack of affordability, lending regulations, tighter underwriting practices and overflowing student debt, we must consider that for some, renting is a lifestyle choice.
In 2019, expect to see a lower rate of mortgage applications and a higher rate of urban-dwelling renters in cities across America.
Renters often have more flexibility than homeowners to move cities, change jobs or adjust for changes in their family unit. This trend is driving down rental vacancies and creating momentum in the build-to-rent movement, which often results in premium new construction featuring amenities like in-building gyms, stainless steel appliances, outdoor spaces, parking and proximity to recreational activities. In 2019, expect to see a lower rate of mortgage applications and a higher rate of urban-dwelling renters in cities across America.
5. Getting creative to satisfy demand
The growing demand for rental properties increases rent prices for existing housing stock, of which there is simply not enough in many areas. Due to obstacles like permitting restrictions, impact fees, land costs and politics, building brand new inventory is not always an option. To satisfy demand, the real estate industry will have to find creative ways to increase supply.
In 2019, developers and builders alike will experiment with unconventional ways to create inventory without building new stock.
Some property owners are exploring co-living, which allows management companies to fractionalize buildings and rent out bedrooms while slashing operational expenses via shared common spaces. Multigenerational housing has also seen a spike in popularity. Reasons for this include declining housing affordability in the U.S. and increasing populations of foreign-born residents. In response, I've seen some builders and developers designing plans for single properties with separate living spaces for adult children and elderly parents. This trend also presents an opportunity to increase supply in existing construction that was not originally developed for multigenerational housing. In 2019, developers and builders alike will experiment with unconventional ways to create inventory without building new stock.
Between increasing demand from retail investors, a growing number of renters, an uptick in joint ventures and a wave of ambitious and creative new projects, both the SFR marketplace and the real estate industry at large can expect to see a great deal of activity in the year ahead.
This being said, many economists predict we may be experiencing a recession sometime in the next two years. Property owners and investors should be cognizant of this potential as they implement their investment strategies. Some sectors of real estate, like SFRs, are likely to perform better than others given the fact a downturn could in fact increase residential rental demand as fewer people may be able or inclined to buy homes. Even so, this is just the beginning for SFR properties as an asset class.
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This article originally appeared in Forbes.