Bluerock continues to hold high conviction in the residential rental sector due to:
“The affordability spread should favor apartment demand relative to single-family home purchases as household formation recovers.”
JOHN CHANG, MARCUS & MILLICHAP
The United States continues to struggle with a national housing shortage providing support for residential sector fundamentals. According to PGIM Real Estate, the United States will need an additional 15 million housing units over the next decade. As shown below, existing home inventory is 50% below the trailing average from 2011 through 2023, putting additional stress on speculative home buyers.
TTM Average National Existing Home Inventory (MM)
Source: National Multifamily Housing Council, October 2023
Chart Source: National Association of Realtors. TTM = Trailing 12 Months
Green Street expects this housing shortage to continue with supply being hampered by the unfavorable capital market conditions. As shown below, new supply is forecasted to fall sharply after 2024, when projects with prior financing have been completed.
Source: Green Street, Residential Sector Update August 2023
The cost of owning a home has never been higher. As shown below, mortgage rates have more than doubled since 2021, making monthly payments unaffordable for many first-time homebuyers.
Additionally, the steep increase in homeowner’s insurance and record high home prices have made the gap in monthly payments between renting and owning the widest on record. As shown below, it is nearly $1,300 more per month to own a median priced home than it is to rent.
Source: Marcus and Millichap, How Does the Housing Market Impact CRE?, November 2023
These conditions have made it so that only 25% of households can afford to buy a home due to the median household income to own a median priced home eclipsing $130,000. (Source: Marcus and Millichap, How Does the Housing Market Impact CRE?)
The millennial cohort is in their prime household formation years, driving additional demand for homeownership and the single-family rental sector due to the need for more space and starting families. As shown below, the generation is growing in the 35-49 age bracket at more than twice the pace of the younger generation entering their 20’s and 30’s. Additionally, according to Bridge Investment Group, this age group is expected to expand 3.8 times faster than the broader US population over the next five years.
Source: Marcus & Millichap 2023 Multifamily National Investment Forecast
According to Morgan Stanley, almost all single-family rental homes are owned by mom-and-pop investors. As shown below, only 2% of the single-family rental market is owned by institutional investors. This provides a significant opportunity for institutions to earn economies of scale and outsized growth in the subsector.
Source: Morgan Stanley Research, August 2022
The single-family rental sector has outperformed during times of inflation, with home values increasing and rent growth outpacing the core CPI rate. As shown below, the single-family rental rate growth has historically outperformed the core CPI rate since 2013.
The residential sector is expected to continue its strong performance due to a national housing shortage, unaffordable homeownership, shifting demographics, a lack of institutional single-family rental ownership, and strong historical performance through various market cycles.
Over the next five years, it is expected across the top 25 SFR markets that the growth of the younger cohort will decelerate meaningfully and the 35–44-year-olds will see a strong acceleration helping support SFR demand. Additional growth is expected into the next decade suggesting a solid runway of demand for SFR operators.
As folks decide on a housing option, many decide between an apartment, a singlefamily home for rent, or a home purchase. Looking at the relative value between the three, renting a home provides more value on a per foot basis. Assuming no changes to the cost of apartments and ownership, SFR rents could climb 50% higher to return to its historical relationship.
Despite a mean-reversion from Pandemic Era performance, the residential sector will continue to provide positive returns due to the national housing shortage, strong fundamentals, unaffordable homeownership, demographic shifts, and institutional opportunity in the single-family rental sector.
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