What a start to the year it has been!
Social distancing measures implemented to slow the spread of the coronavirus and “flatten the curve” has ultimately led to a large part of the US economy being shut down. Since the coronavirus was declared a pandemic, nearly 41 million Americans filed jobless claims(1). Unemployment has skyrocketed as non-essential businesses have closed their doors and many employers have been forced to lay off or furlough employees.
What’s unique about this recession is the dispersion of outcomes for different real estate sectors.
April Rent Received by Sector
Single Family: 95%
Shopping Centers: 47%
Impact on Single Family Rentals
As investors first began to assess the impact of the pandemic on various sectors of real estate, the initial focus was on rent collections. Before anyone could focus on future leasing or occupancy expectations, the market was looking to get a sense of cash collections from in-place tenants given the uncertainty. With most institutions having released updates on April rent collections and some offering insights into May collections as well, investors are beginning to focus on the second order effects of the corona virus – future leasing and occupancy.
The data from large portfolio owners indicates that the single family rental sector has performed well:
Tricon American Homes (Ticker: TCN): In April, TCN collected 98% of absolute rent (99% of historical average). As of April 30, 2020, Tricon reported that their SFR portfolio was 97.4% occupied and experienced blended April rental rate growth of 5.0%(2).
“[SFR] is one of the very few businesses where you’re seeing demand accelerate…all of our demand drivers are up. Multifamily will be neutral, industrial is probably neutral from where it was, but Single-family comes out a winner and demand is going to explode.” -Tricon CEO, Gary Berman(3).
American Homes for Rent (Ticker: AMH) is a large, diversified Single Family Rental REIT with properties in 22 states and roughly 200,000 residents. As of May 5th, the company collected 95% of April rents and 82% of May rents which represents roughly 94% of their typical historical monthly collections through the first five calendar days of the month(4).
Invitation Homes (Ticker: INVH) reported similar statistics collecting 95% of their historical average rent collection rate in April and 97% of the pre-COVID 19 historical average in May(5). Similarly, INVH reported a strong same-property occupancy trend improving from 96.9% in March to 97.5% in May. INVH experienced positive leasing metrics in April and May as well with blended rent growth of 3.2% in April and 3.4% in May.
Like the previous recession, Single Family Rentals have been performing better than other real estate asset classes. This can be attributed to a multitude of factors including tenant profiles, a shortage of affordable housing and demographic trends.
1. Tenant Profile
Typical single family rental tenants tend to be your average household. They have jobs with commutes, kids in school, and a significant portion of these households consist of married couples which in many cases means two earners. We think these tenants are less likely to make a move to avoid uprooting kids, changing jobs, etc. because they tend to be further along in their life stages and more established than their multifamily counterparts. Industry experts have also predicted that in the face of a lockdown at home, tenants who live in smaller apartments or multi family rentals are more likely to make move into single family rentals that typically have larger space and access to outdoor yards and garages.
Below offers a look at the demographics of single family rental tenants vs. multifamily rental tenants(6):
- 38% of SFR tenants are married vs. 21% of multi family tenants
- 52% of SFR tenants have kids vs. 30% of multifamily tenants
- 30% of SFR tenants are under 35 vs. 37% of multifamily tenants
- $42,600 SFR tenant Median Household Income vs. $32,400 in multifamily
- 5.6 year avg. stay in the same home for SFR tenants. While multifamily turnover rates vary based on product type it is safe to say they tend to be lower than 5.6 years.
2. Affordable Housing Supply is Lagging
Demand has outpaced supply when it comes to affordable, entry-level housing stock(7). Developers have been targeting higher price points where they see higher investment returns.
In some cases, entry-level supply is being built, but it is further out from large cities where the land is far cheaper often causing buyers to sacrifice walkability, commute times, school districts, public transportation, and other factors important to many households. This has caused well-located single family homes that were typically at the “entry-level” price point to appreciate rapidly. According to Zillow, the median sale price for these homes has grown 57% over the last 10 years ($250k in Feb 2020 vs. $159k in Mar 2010)(8).
On the other hand, average hourly earnings for all employees grew only 27% over that same time period(9). Home ownership is simply becoming further out of reach for many Americans. This leaves many in a situation where renting is the only realistic option.
3. Younger Generations Prefer Renting
As of August 2018, just 18% of millennials (aged 21-37) wanted to own a home. That number for Gen X (aged 38-52) was 25%. This is in stark contrast to the fact that in January of 2016, 40% of millennials wanted to own and 46% of Gen X’ers wanted to own(10). There is clearly a pronounced trend away from home ownership. We think this will create pent up demand for single family rentals as 12.5m net households are expected to be formed over the next 10 years as millennials age and continue to progress through life stages such as living on their own, getting married, and having children that many have pushed off further than prior generations due to education aspirations and the associated financial burdens.
2020 has brought volatility to the markets and to each of our lives in general. However, because of the fundamentals of the single family rental asset class, it is again proving to be one of the more defensive real estate investments.
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6 John Burns Consulting