Residential Real Estate Industry Insights from Q1

The May 2018 Single-Family Rental Analysis and Forecast report from John Burns Real Estate Consulting is chock-full of insights that are highly relevant to single-family rental investors. We teased out some facts that focus on renter preferences and demographics, trends in the residential real estate industry, and market patterns. Read on for key highlights. 

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Single-family renter preferences and demographics

  • Single-family renters value having private laundry, privacy from neighbors, and ample parking far more than storage and landlord relationship.
  • Young families not in a position to own will overwhelmingly target single-family rental properties over apartments given their life stage and preference for good schools.
  • Of the former homeowners who returned to renting single-family homes, 31% cited a change in family as the primary reason, followed by 27% who cited foreclosure as the main driver.
  • Down payment and credit score are bigger barriers to homeownership than income or job stability. Approximately 64% of single-family renters cited high down payment and closing costs as a barrier to obtaining a mortgage, and 51% had unqualifying credit scores.

Approximately 36% of all renters want their next rental property to be a single-family home. The percentage of all renters intending to rent a single-family home as their next home has increased 5% since 2016.

  • Compared to apartment renters, single-family renters are older and more likely to be married with kids.
  • Single-family rental homes make up 23% of all residences for 25–34 year olds; 19% for 35–44.
  • The percentage of 30-year olds hitting life-stage milestones has fallen precipitously compared to past generations. While many of these milestones have been delayed, over time young adults will move out on their own, get married and have children. In the meantime, these younger cohorts represent significant demand in the pipeline for single-family rental operators.

>>Related: How to better understand renters of single-family houses

Single-Family Rental Industry Trends

Single-family rents are more stable and less responsive to the business cycle than apartment rents and home prices.

  • Single-family rent growth has historically stayed positive even in recessionary periods.
  • According to John Burns, "our call for moderating rent growth ties to our forecast for a mild recession in 2020/2021." However, "SFR rental homes have the unique advantage in a recession of receiving demand from those who go through foreclosure... Rent growth has historically stayed positive, even in recessionary periods."

>>Related: Single-Family Rentals Offer Strong Investment Alternative to Stocks and Bonds, With Far Less Volatility

Single-family rental occupancy rates continue to trend higher

  • Adjusting for seasonality, 94% of all US single-family rental homes are currently occupied (highest level since 1998).
  • Current demand for rental homes suggests occupancy levels will continue to approach and soon exceed the historical average in coming quarters.

Continued job growth will help drive steady demand for rental housing

  • John Burns assumes the economy will grow for 11.5 consecutive years, and forecasts continued annual job growth through 2021.
  • The strongest forecasted job growth for 2018–2021 is in Orlando (+1.9%) and Dallas (+1.7%).

Single-family rental home units are rising steadily

  • Since 2006, 4.9 million single-family homes have become rental properties, compared to 4.6 million newly created apartment units.
  • Single-family rental homes have become a much larger share of the overall rental market since 2006.
  • Since 2006, the market share of single-family rental homes has grown the most in Phoenix and Atlanta, gaining an additional 11% share of the rental market.
  • Build-to-rent (B2R) continues to gain traction, with more SFR operators and national home builders crafting partnerships.

New entry-level home construction is down

  • Since 1999, new homes built with less than 1,800 sq. ft. (proxy for entry-level home construction) declined from 37% to 22% of annual new home construction.
  • Builders are now focusing on smaller homes under 1,799 square feet to supply the entry-level buyer.
  • The age of single-family rental housing stock is older than apartments, which provides opportunity for new build-to-rent SFR product.

Homeowners are staying put longer, further suppressing inventory

  • Since 2008, homeowners have gradually increased the time in their home before selling—up from 6 years to 10 years.

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Market Patterns

  • Single-family rental investors have had to lower return hurdles given rising competition. Tertiary markets and workforce rental housing deemed “un-sexy” have become increasingly popular.
  • Rents and home prices are forecasted to grow 7%+ and 10%+ respectively through 2021 in almost all top markets.*
  • On a national level, rents on new SFR leases rose a healthy 3.4% YOY in March 2018—up slightly from 3.2% YOY in March 2017.
  • There is solid 3.8%+ income growth in most top markets, which supports single-family rental rate increases.
  • Single-family rents are up the most YOY in the Southwest, from +4% to +6%
  • Midwest markets have the highest yield and best purchase affordability. The top three are Indianapolis, Cincinnati, and Chicago.
  • The strongest YOY price appreciation is in Las Vegas (+14%), Nashville (10%), and Salt Lake City (+9%).

Strongest YOY rent growth

  • Riverside-San Bernardino (6.1%)
  • Salt Lake City (+5.9%)
  • Atlanta (5.0%)

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*John Burns Real Estate Consulting defines the top 20 U.S. rental markets as the following: Atlanta, Charlotte, Chicago, Cincinnati, Columbus, Dallas, Denver, Houston, Indianapolis, Jacksonville, Las Vegas, Miami, Nashville, Orlando, Phoenix, Raleigh, Riverside-SB, Salt Lake City, San Antonio, Tampa 

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