SFR, Multifamily Battle for Investment Dollars

Article originally posted on Globe St. on January 7, 2022

Institutional investors are focused on better yields but aren’t necessarily still aggregating units

The flows of cash aren’t all pulling out of multifamily and settling into single-family rentals. But the SFR category has been getting more attractive to big investors over time and has become a force to reckon with.

A presentation from real estate consulting firm RCLCO  pegs the current SFR market—including houses, townhouses, row houses, duplexes, or quadruplexes—as 22 million units, or a third of all rental housing in the US. And there will be demand for an additional 2.5 million over the next decade.

There is some disagreement about the absolute numbers. “Based on 2021 projections renter households account for 44 million out of 140 million households,” Al Lord, founder and CEO of Lexerd Capital Management, tells GlobeSt.com. He sees the SFR share as 40% of total units.

But 33% or 40% is a massive chunk, no matter which is more accurate.

Even so, cap rates for multifamily and SRF have become roughly parallel at between 4% and 6%, according to Marc Benjamin, a partner at law firm Eversheds Sutherland. But picking an outright winner requires navigation through some hard questions.

“Are SFRs easier to manage than multifamily properties?” says Benjamin. “Do  SFR tenants tend to continue to renew their leases and stay longer than short-term tenants renting at multifamily properties? Is rent growth anticipated to be stronger in the SFR market? Will SFRs have a greater opportunity for appreciation than multifamily properties, making them the more desirable choice for institutional investors?”

The vote from the institutional investors isn’t as rock solid as one might like. “From 2000 to 2020, the population-adjusted stock of multifamily units has remained steady at 114 units per 1000 people while the stock of single-family units has increased from 277 to 286 units per 1000 people,” Lord adds.

However, a combination of conditions could be encouraging. “Continued institutional equity investment in the build for rent space coupled with strong sales prices, absorption trends and rents are going to further lender demand in the space,” says Zachary Streit, senior vice president at George Smith Partners. “We expect and are already seeing new players enter the space, which should have positive impacts on terms for sponsors. In a crowded field, the key is knowing which lenders are likely to perform. I expect lenders will continue to shy away from tertiary markets, due to uncertainty regarding market liquidity, and also urban cores where land is just too expensive to justify the strategy.”

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