This blog post is one of a series excerpted from Aaron Quach’s white paper on rental housing, available at the link above. For other posts in the series, click here.

The vast majority of institutional real estate portfolios are invested in the rental housing sector in some form. The rental housing sector is unique in that it fulfills the basic human need for shelter and therefore benefits from a certain inelasticity of demand not found in most other property sectors.

The rental housing sector is comprised of several different housing types serving various segments of the market, including market-rate multi-family apartments, rent-regulated multi-family apartments (“affordable housing”), manufactured housing communities, single-family rental homes, student housing accommodations, and senior housing facilities.

This blog post will detail issues for institutional investors regarding single-family rental homes. Other blog posts will examine the additional sectors as well as implementation issues faced by all of the housing types categorized under the rental housing sector.

Single-Family Rental Homes: Big Change After GFC

Historically, single-family homes were purchased solely for owner occupancy; however, the Global Financial Crisis (GFC) gave rise to a new sector focused on single-family rental homes. It is estimated that as of June 2022, institutional investors (defined in this context as those that own more than 25 homes) own approximately 574,000 out of the 15.1 million single-family homes in the U.S., representing institutional market share of 3.8%, according to the Urban Institute. Institutional single-family rental (SFR) owners are categorized as either long-term owners (including the largest institutional SFR operators such as Pretium, Invitation Homes, American Homes 4 Rent, and smaller owner-operators) that own 87% of institutionally owned SFR; or short-term owners (including home flippers (such as Offerpad, Opendoor, Zillow), builders, government agencies, and servicers) that own a combined 13% of institutionally owned SFR, according to Urban Institute data.

Build-to-rent (BTR), also known as build-for-rent or purpose-built SFR, is a growing subset of the single-family rental sector and refers to contiguous communities of single-family homes purpose-built for rental. BTR differs from the traditional SFR strategies, in which the locations of homes are scattered rather than within the same community. BTR communities often share common designs, layouts, and amenities, in a similar fashion to new for-sale single-family home communities.

BTR adequately addresses some of the operational challenges associated with scattered-site SFR, with centralized property management and maintenance that allow for greater operational efficiency. In addition, because BTR projects add to the supply of housing, there tends to be less concern regarding institutional owners driving up housing costs in BTR, compared to scattered-site SFR. BTR communities tend to be located further from the urban core, due to the need for large plots of land to sufficiently accommodate the quantity of individual home sites.

The demographics of the prime renter cohort for single-family rentals—defined as those 30-44 years old—has gradually increased with the aging of the millennial generation, whose members are searching for more square footage and outdoor space to accommodate a growing family with young kids and/or pets. In addition, changing lifestyle preferences have led some would-be home buyers to remain renters, citing greater flexibility, mobility, and freedom from property maintenance.

Institutional investors seeking exposure to the single-family rental sector will find a growing list of investable options, including a handful of publicly traded REITs, dedicated scatter-site SFR funds in open-end and closed-end vehicles, dedicated BTR funds in closed-end vehicles, diversified open-end core and core plus funds with substantial scatter-site SFR and BTR exposure, and diversified value-add and opportunistic funds selectively pursuing both scatter-site SFR and BTR.

Institutional investors should consider the potential for headline risk, as critics of the sector note the increasing share of institutional ownership in the SFR market and the impact on rising housing costs. These criticisms have been a topic of conversation among tenant advocates as well as legislators. In addition, the leasing and eviction practices of some institutional landlords have also drawn scrutiny in recent years. Proponents of the SFR sector argue that institutional ownership represents less than 5% of single-family rental homes, and that other factors such as underbuilding, zoning, and NIMBYism are the primary contributors to the rising cost of housing. These proponents also argue that single-family rentals provide a solution to these affordability challenges by offering desirable rental options to those priced out of homeownership.