Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.
For eons, ownership of single-family homes for rent was dominated by small-time investors. Then institutional investors found the market, buying houses through the foreclosure crisis to rent in bulk. Now, builders are increasingly getting in on the act.
Developers built 11,000 single-family houses to rent in the second quarter of 2019, according to the latest Census Bureau data analyzed by the National Association of Home Builders.
In all, some 42,000 single-family, built-for-rent (SFBFRs) were built nationwide between the second quarter of 2018 and 2019 — about the same as the previous four quarters. That’s 84,000 housing units started over the past two years, which comprises only just under 5 percent of the total size of the building market.
The stock of existing single-family housing still accounts for 35 percent of the rental housing stock, according to the latest Census numbers.
“As homes age,” the NAHB’s chief economist Robert Dietz recently explained in a post on the builder’s group’s “Eye on Housing” blog, “they are more likely to be rented.”
The vast majority of these houses are still owned by individual households, largely people who turned their homes into rentals and moved on to new digs or investors who hold only a handful of such properties. According to a report from Freddie Mac, these mom-and-pop investors own nearly 90 percent of all single-family rentals, with those owning 50 or more units holding just 5 percent.
In fact, according to CoreLogic, smaller investors are responsible for increasing investor homebuying activity in “sharp contrast” to the rise in large institutional investors in the years following the recession.
When looking at investor activity based on the total number of properties purchased, the data analytics company found small investors — those who purchased 10 homes or less between 1999 and 2018 — have increased their share of buying more than large and medium-sized investors. These so-called “mom-and-pop” investors grew to more than 60 percent in 2018, up from 48 percent of all investor-purchased homes in 2013.
Large investors — those who purchased more than 101 homes — nearly doubled their activity between 2000 and 2013 but have pulled back since the foreclosure crisis and now sit at 15.8 percent of purchases, CoreLogic said. Medium-sized investors — those who purchased between 11 and 100 homes — have also seen their share steadily fall, from a peak of 30 percent in 2010 to 22.7 percent in 2018.
Now cometh the builders of our new houses themselves. According to various reports, giant companies like Lennar, Taylor Morrison and Toll Brothers have all started purely built for rental projects, some for eventual sale to investors and others to have and to hold.
And why not? Once builders are through with their investment — or tire of them — they can always rehab their properties and sell them to folk who want to buy and occupy them. Just like condominium builders did when the for-sale sector of apartments flagged some years back.
Builders aren’t just erecting separate, free-standing for-rent communities, they also are building for-rent neighborhoods of single-family houses in large, master-planned projects.
The data shows that most of this activity is happening in the center of the country and in the South. Almost a quarter (9,000) of these new-single-family, built-for-renting homes are in Arkansas, Louisiana, Oklahoma and Texas. The second highest concentration of this kind of new housing is in the states of Alabama, Kentucky, Mississippi and Tennessee, with about 7,000 homes or 18 percent of this market.
Though relatively small, the NAHB predicts that share of SFBFR homes will grow in coming years and will do so in markets that haven’t had as many in the past. These kinds of homes are associated with families who cannot come up with a downpayment to buy a home.
For real estate agents who dabble in the new-home market, the trend means there will be less product to sell and buy, especially in places more heavily impacted. But for agents who specialize in rentals, it could be a godsend.
Developers of big planned communities like the idea of SFBFR neighborhoods, not just because they make for a more complete housing mix, but because tenants often become future buyers. In a recent podcast, John Burns of John Burns Real Estate Consulting, an advisory firm in Irvine, California, said “these people want to test drive our master-planned communities for a while and will then become homeowners.”
He also pointed out that SFBFR neighborhoods are lower in density than apartments, but closer together than houses in a typical for-sale section. Furthermore, whereas homeowners tend to look down their noses at apartments and their occupants, they look more favorably at houses built for rent and are occupied by people who tend to be less transient than the usual tenant.
Also, the rental houses are professionally managed and maintained, diminishing concerns that these they will negatively impact the values of surrounding housing, he argued. In fact, there is a less of a threat from these units than from individual houses rented out by their absentee owners.
According to a recent survey of renters by Freddie Mac, nearly half prefer a house over an apartment. And for most developers, the target market is not just millennials. It’s also empty nesters who are done taking care of their houses, and don’t want to use their retirement money for a downpayment. They want to move down the housing ladder, but not too far down.
The Burns company has been conducting market studies for built-for-rent properties for the past two years. The typical project holds about 130 units, though one called for more than 450 houses. So far, absorption rates range from eight to 10 units a month, but one operator has hit a rate of 35 houses a month.
“Within the next two years,” says the Burns firm’s Senior Vice President of Research Jody Kahn, “we expect to see completed build-for-rent sections within many of the nation’s top selling master plans.”
Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.
