2020 saw an increase in the construction of single-family homes as compared to apartment units, according to Robert Dietz, the chief economist of the National Association of Home Builders.
So, will SFR construction will outpace multifamily with time? Also, apart from SFR, the BFR (Build-for-Rent) sector is slowly gaining ground, according to a report by Walker & Dunlop.
Now, historically, small-scale investors and individual investors have ruled the market. However, SFR has always occupied a certain portion of the rental market. Families having small children, and retired people look for single-family homes with yards and upscale amenities.
The Difference Between SFR And BFR
The Difference Between SFR And BFR
The commercial real estate sector often sees terms like SFR and BFR used interchangeably. However, they are different from one another.
SFR, for instance, refers to a group of houses located in different geographical areas, and they are pooled together for the sake of investment. These include town homes, single-family detached homes, and also two-to-four-unit properties.
SFR properties are not that hard to find. However, rural markets make up close to 66% of the rental housing stock. If the overall rental space is considered, the SFR market has been a long-standing asset class.
That being said, institutional investors have been making their way into the market.
On the other hand, BFR properties are purpose-built housing.
They are meant to be operated as SFR properties. They resemble multifamily properties. The houses in BFR properties are contiguous and function as a single rental community.
Among those who are familiar with SFR, BFR is a novel concept, something popular among investors and traditional multifamily developers as well. The BFR market forms about 5% of the new homes that are being constructed, but the chart’s on a steadfast ride up.
Why SFR Construction May Outpace Multifamily Constructions
Why SFR Construction May Outpace Multifamily Constructions
Migration patterns as a result of the COVID-19 pandemic have only caused that demand to rise. Factors such as travel restrictions, and social distancing measures have prompted several renters to look for more space. So, they found their way to suburban markets and also in small metropolitan areas.
Since there was an increase in demand for space devoted to remote work and schooling, the need for larger living quarters arose. Besides, prices of houses were rising at a rapid rate. So most families with moderate income found it difficult to buy new homes.
Since the end of the Great Depression in the US, the SFR sector has been growing. Today, it has become the fastest-growing sector of the US rental market, fuelled chiefly by economic factors. The factors that kept several potential home buyers at bay primarily included:
- Heavy debts,
- Short sales,
- Home foreclosures,
- A tight and competitive job market.
Many middle-class people could not afford new houses, but they earned enough to invest in a rental home. The changing attitude regarding homeownership was another factor that prompted the sector to grow at a steady pace. As reported by RealtyTrac, between 2006 and 2016, over 6.3 million foreclosures took place.
According to Walker & Dunlop, the growth of SFR may outpace the development of office, retail, hospitality, and, most importantly, the multifamily sector by the year 2022. With the continuously soaring demand for SFR, more and more investors are investing in it.
The investors who were prone to investing in office, retail, and so on are gradually going towards the SFR market. In comparison to the multifamily market, the SFR market is estimated at $3.4 trillion.
Recent Trends In The Multifamily Market
Recent Trends In The Multifamily Market
According to reports, the strength of the multifamily market increased to a considerable extent in Q2 in the U.S. market. There was a quarterly absorption of about 179,400 units in the multifamily market.
The overall rate of vacancy rate in this sector witnessed a downward trend. It decreased by 70 basis points (bps) to a healthy 4.0% in Q2. At the same time, the average rent rose by 3.5% from Q1. It is the second quarterly increase to be reported since Q1 2020.
The levels of construction continued to be fairly high. About 65,600 units were added in Q2. This brought up the year-to-date total to 117,900. The new supply was outpaced by net absorption of 197,300 units in H1. The investment volume in the multifamily segment rose by 34% quarter-over-quarter in Q2 to $52.7 billion. Despite all these trends, it seems SFR construction will soon outpace multifamily construction.