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Unlocking the Potential: Why You Should Consider Investing in a Large SFR Real Estate Portfolio

In recent years, institutional investment in single-family rental (SFR) homes has been on the rise, expanding across various markets nationwide. This surge in popularity is driven by several key factors. High mortgage rates, difficulties in finding suitable homes, and challenges in accumulating down payments have led many potential homebuyers to consider renting single-family homes. The allure of more space, private yards, and shared amenities in these rental properties has grown, presenting a significant opportunity for investors to cater to the increasing demand. Institutional developers are keen to meet this demand, but they are adapting their strategies for long-term success.

SFR Real Estate Portfolio

As of mid-2023, institutional SFR investors collectively own approximately 600,000 single-family rental units, which represents only 3% of the 17 million single-family rental homes and a small fraction of the 82 million occupied single-family homes. These investments can be found in scattered-site properties, individually acquired homes, and purpose-built SFR communities.

This year, institutional purchases have seen a decline in tandem with the overall drop in home sales. Currently, the segment is most active in Build-to-Rent (BTR) communities and new construction projects. Wall Street investors are adapting to a challenging real estate landscape characterized by limited home availability and high mortgage rates. The traditional approach of acquiring existing homes for single-family rentals (SFR) is becoming less viable due to a shortage of resale supply. To address this, investors are turning to Build-to-Rent (BTR) developments and partnerships with homebuilders to expand their portfolios.

Prominent shifts in the market include joint ventures and acquisitions, such as American Homes 4 Rent's $625 million deal for new rental homes and Pretium Partners' $1.5 billion acquisition of thousands of homes from D.R. Horton. Rising mortgage rates and fierce competition in the housing market are key drivers of this strategic shift, impacting investors' profit targets and buying power.

The BTR market has gained momentum as it offers renters a more accessible path to a high-quality living environment. Challenges for investors include elevated home prices, but opportunities exist in capitalizing on the appreciation of homes and exploring emerging markets in secondary and tertiary cities.

Institutional investors are expected to maintain their presence in the BTR space due to its long-term investment potential and resilience against traditional housing market uncertainties. However, they may also revert to traditional real estate investments as market conditions evolve. Overall, the real estate landscape is dynamic, with opportunities in both institutional SFR and BTR sectors for investors seeking profitability and flexibility.

The future growth of institutional SFR investments hinges on several key factors, including the trajectory of interest rates, home prices, and investor demand for specialized commercial property products.

One of the most compelling factors driving investment in this sector is the consistent increase in rental prices. From January 2020 to mid-2023, the single-family rental (SFR) market has witnessed a remarkable surge in average rent, with an impressive increase of 27.9%. This surge in rent can be attributed to various factors, including the impact of cooling home sales and the rise in mortgage rates, leading to soaring property values in the housing market. In response to these changing market conditions and the prospect of lower total returns, institutional single-family rental property companies have been compelled to adapt their growth strategies.

These companies are now directing their focus towards build-to-rent (BTR) projects and acquiring portfolios from smaller property owners. BTR projects, in particular, are poised to make a significant impact in 2022. With over 25,000 units currently under construction and nearly 4,300 units already delivered in the first half of the year, BTR projects are expected to deliver a record number of units, showcasing the industry's response to the evolving real estate landscape.

Annual SFR Completions
Annual SFR Completions by Yardi Matrix

The surge in SFR rents has been particularly pronounced, with a substantial increase of 27.9% from January 2020 to mid-2023. This surge has been even more impressive when considering the period since 2018, with an overall increase of 39.8%. The years 2021 and 2022, in particular, experienced substantial growth in rents, with an increase of $350, equivalent to a 20.2% surge. Year-over-year growth in rents reached its zenith in the first quarter of 2022, with a remarkable 15% increase. Although rent increases have moderated in the first half of the current year, with a rise of $23, year-over-year growth continues to maintain a steady pace of 1.3%.

Certain locations have experienced even more robust year-over-year growth in SFR rents, with Nashville leading the way at an impressive 21.3%, followed by Baltimore at 13.3%, Chicago at 11.1%, Pittsburgh at 10.7%, and Philadelphia at 8.3%. Conversely, some areas, such as Orlando, Miami, and the Inland Empire have observed weaker rental numbers, with year-over-year declines of -20.9%, -8.6%, and -4%, respectively.

Notably, when evaluating rents per square foot, an intriguing pattern emerges. In 27 out of the 34 largest institutional SFR markets, single-family rental units command higher rents per square foot compared to their suburban multifamily counterparts. This discrepancy is most pronounced in cities like San Francisco, Orlando, San Diego, and Raleigh-Durham. In fact, only in six of these 34 metros do SFRs yield less revenue per square foot than suburban multifamily units.

Furthermore, the SFR sector continues to maintain high occupancy rates, further emphasizing its appeal to investors. Since January 2019, the SFR occupancy rate has consistently ranged between 95.7% and 97.2%. Even in July of this year, with a slight dip of 30 basis points year-on-year, the occupancy rate remains robust at 95.8%. This consistent occupancy rate provides reassurance and signals a promising future for the institutional single-family rental market. These factors, in conjunction with the strategic adjustments made by institutional property companies, reflect the evolving dynamics of the real estate market and the growing interest from institutional investors in the single-family rental segment.

In conclusion, the institutional investment landscape for single-family rentals is evolving and presents an attractive opportunity for investors looking to diversify their portfolios. With the consistent rise in rental prices, strong demand, and high occupancy rates, the potential for growth and profitability in this sector is evident. If you're considering expanding your real estate investments, a large portfolio of institutional single-family rental properties may be a strategic move worth exploring.


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