Though low-density rental housing is gaining popularity as a sector, it continues to face hurdles in the market, including competition with the hot for-sale housing market for land as well as lack of familiarity with the product among communities, speakers said during a session at the 2021 ULI Virtual Spring Meeting.
Of 48.4 million U.S. rental households, 14.9 million live in single-family-housing rentals, according to Todd LaRue, managing director with real estate analysis firm RCLCO and session moderator. Most properties are owned by small investors or are mom-and-pop operations, with only 2 percent operated by institutions. Most of these rental properties are located in the Sunbelt and the intermountain west, with a large concentration in the Midwest, he said.
The increase in demand for the product is being driven by two factors, LaRue said—rising housing costs and demographics. While incomes have risen, they have not kept pace with home price increases, he noted. In addition, younger buyers—particularly those ages 35 to 44—are starting to form families, moving out of apartments, and seeking more space.
That age cohort is expected to grow by 8 million over the next 15 years, which will create “tremendous demand,” said Ashley Casaday, senior director, capital markets, at RangeWater Real Estate, an integrated real estate company based in Atlanta.
“If they’re above the age of 35, they’ve already lived through two down cycles, they likely have student debt; maybe they don’t have the money to put down on a downpayment,” she said. “We’re also finding that these are really renters by choice: they like that lifestyle; they like being able to be mobile and move if they get a new job somewhere.”
Another demographic drawn to the product is baby boomers seeking to downsize from where they raised their kids, she said. “But the thought of jumping from that lifestyle to independent [retirement] living—they’re not ready for that; it’s too much,” she said. “Single-family rental has helped serve that need—of both of these demographics that are rapidly growing and expanding. So, we’re big believers.”
Sean Flannery, managing director, Pacific Coast Capital Partners (PCCP), a San Francisco–based real estate investment trust, said because a vast majority of the single-family rental market is run by mom-and-pop operators, his company sees it as a promising market.
“[T]he expectation is, this is such a small part of the overall residential market, but it has much more potential to grow because it’s a product that hasn’t really been supplied so much in the past by an institutional investor,” he said. “With an institutional approach, we think the growth rate of the rental income is better than even the multifamily outlook over the next five to 10 years. We’re a long-term holder of the business. We expect to have to develop what we need because there’s not a lot of it out there.”
Casaday said when developing single-family rentals, her firm looks for markets with strong population and job growth, but also where there is a lower barrier to entry and land costs are reasonable. In practice, she said, this means the company is finding the best economics “one ring outside of where we would traditionally have looked for multifamily.”
Andy Carmody, managing director, investments, at Toronto-based Tricon Residential, a manager of single-family rental houses and apartments, said his firm is focusing its efforts on high-growth Sun Belt markets—the U.S. Southeast, Texas, and the “more affordable Southwest.” In higher-cost West Coast markets, it is difficult to generate a reasonable return because the underlying costs of existing properties or land are too high and the rents that can be obtained are not correspondingly high.
Those high costs are being driven in part by the very strong single-family home market, Casaday said.
“The single-family for-sale market is so hot right now, not only is it driving up land prices, but we’re competing with homebuilders for these sites. They can pay more than we can for the land,” she said. “It’s making it very challenging, regardless of construction costs, to get some of these deals to work.”
Carmody said for the financial considerations to work, his firm aims to develop sites at eight to 10 three- to four-bedroom entry-level detached houses per acre, each with its own garage, a driveway, and a small private yard, but that it often faces roadblocks because sites are hard to find and cities are reluctant to approve projects at that density.
“They’re not conventional single-family that conforms to single-family zoning, and they’re not multifamily,” he said. “They fall in this middle spot, which requires a tremendous amount of time—hand holding, engagement, discussion, question and answer, and making your way through all the regular municipal approvals.”
Panelists agreed that both municipalities and neighbors need to be educated about this type of development—that it is class A product that attracts families with good household incomes, and that it can range from a cottage to a townhouse to a five-bedroom detached house. For residents of a community that is institutionally owned and managed, “it’s a foreign concept to think that they would have a community that looks like theirs but it’s full of renters,” Casaday said.
She predicted that sometime in the future there will be a zoning designation specifically for single-family-rental housing.