Five Reality Checks for Single Family Rentals


Ten days recovering from surgery puts a different perspective on things that you care about and might take for granted ? like your health and the prospects for single family rentals.  Over the past five years, the REO-to-rental, single family investment, buy-and-hold, whatever-you-want-to-call-it business came out of nowhere and blew the real estate industry away.  Many people have worked very hard, taken serious risks and made sacrifices to create attractive, safe, affordable housing.

However, things are changing and here are five challenges the business must meet to overcome the challenges of change.

1. The current pace of demand for new housing will decline by 2025.

For several decades we’ve grown accustomed to an ever-expanding demand for housing that’s capable of soaking up enough rental and ownership properties to drive prices consistently upward at a rate of 3 to 5 percent a year—with time out for the housing crash which we are quickly making up for.  Those days are ending.

In the aftermath of the Great Recession, the U.S. labor force shrank for three consecutive years – the only multiyear decline in postwar history.  Although short-term cyclical factors drove some of the recent workforce contraction, longer-term forces – including the continued retirement of Baby Boomers – will soon usher a prolonged period of slower labor force expansion.

The most recent projections from the U.S. Bureau of Labor Statistics (BLS), which are based on the Census Bureau’s 2008 population projections, call for annual labor force growth averaging just 0.6 percent between 2012 and 2025.  This compares with average growth of 1.5 percent per year between 1948 and 2012.  Without jobs, immigration will dry up (Source Fannie Mae Housing Insights, Volume 3, Issue 7).  Bottom line is that the days of continuous strong demand for additional housing are ending, at least for the foreseeable future.

2. Rental units have exploded and rents are coming under pressure.

It’s no secret that there has been an explosion in rental units over the past three years.  Starts have doubled in the multifamily sector, hitting 260,000 units per year.  Total multifamily starts should exceed 400,000 units in 2014.

Nationally single family rentals have become the fastest growing sector in rental housing, outpacing multifamily and other alternatives like mobile.  Single family rentals increased from 14.8 percent to 18.2 percent of ALL housing over the past six years.  By 2010, 35.5 percent of all rentals were single family.  (Source Single-Family Rental Housing – The Fastest Growing Component of the Rental Market).

Altogether, that translates into approximately 3.5 million new single family rentals and 400,000 new multifamily units next year.  Meanwhile, the homeownership rate has been falling since 2004 and is expected to bottom out at 63 percent, adding more than 2 million households to the rental population (see Blackstone Funding Largest U.S. Single-Family Rentals).  (Every one percentage point drop in the homeownership rate represents a change in the living situation of about 1.1 million American households).  Are we in the process of overbuilding the rental stock by some 2 million units?

In housing terms, that’s not a huge amount—there are about 94.5 million renters living in 38 percent of the nation’s housing stock.  At a local level however, it can be catastrophic if you live are a property owner in need of tenants who happens to live in the wrong place.

It’s hard to track how the impact of this new supply, both single family and multifamily, meshes with the new demand.  Rents have grown around six percent annually in the past few years, which is a lot.  Rents have reportedly stayed strong and vacancy rates low through the first three quarters of this year (see Vacancy Rates Record Low, but Not Rents).  Rents have held their own despite a huge increase in rental units, both single and multifamily.

A final point on demand.  We do not live in a “Rentorship” society.  Homeownership is far from dead.  As of 2012 there were 197,024 Americans living in owner-occupied homes versus 94,495 renters (Source National Multihousing Council).  Moreover, half of all renters won’t be renters long.  Some (52 percent), including 60 percent of single?family renters and 44 percent of apartment dwellers, plan to buy within the next five years, according to the Memphis Invest National Renter Survey that we conducted ten months ago.  This year nearly five million more families will buy homes, more than any year since 2007 (Source NAR).  It’s true many buyers were attracted by historically low interest rates and prices lower than they may see again in their lifetimes, but still only half of those who applied for a purchase mortgage got one (Source Mortgage Closing Rate Declines Despite Lender Claims).  In other words, Americans might have bought 10 million homes this year if we still operated under the same lending standards as in 2006, when we bought more than 7 million homes.  (I’m not advocating a return to the bad old days of lending, just making the point that 100 years of homeownership marketing isn’t going to die in six years).

What about the new wave of household formation?  From 2007 through 2011, an average of roughly 550,000 households formed each year in the United States, according to the U.S. Census Bureau.  This number was the lowest level since records started being kept after World War II, and was 59 percent below the annual average of 1.35 million household formations from 2000 to 2006.  A healthier employment situation should push household formations up to about 1.5 to 1.6 million a year over the next several years, according to the Federal Reserve.  (Source  What’s the Story behind Household Formations?) Guess where that pent-up demand will end up?  Yep. More homebuyers.


3. Is the pressure already starting to show?

Recently USA Today published a very handy chart based on Census data showing the saturation of single family rentals by metros.  As we all know, the population of single family rentals varies greatly by local due to the availability of distress sales, cap rates, investor activity and more recently, institutional investor presence.

Just for the heck of it I compared median asking  rents for several SFR markets from the USA Today’s list with the latest trend data on rents, which I found on Rentbits).  Their data neatly blended single family, multifamily and unit size to get a median residential rent.  I added a national median with Reis data to provide a comparison.  I was looking for any indication that the combination of new single family and multifamily rental stock, which until recently was generating an annual national rent growth in the 6 percent vicinity, may now be slowing down in markets known for single family rentals.

Median Asking Rents, July-October 2013


SFR Saturation

July Median

October Median












Colorado Springs




















Las Vegas





Los Angeles
















These quarterly asking rent rates are far below the levels these markets have enjoyed in recent years.  Perhaps more disturbing is the correlation between higher saturation rates and rental declines.

4. The REO-to-rental strategy to securitize single family rentals may not save the hedge funds.

The long awaited marketing of the first single family rental-backed security by Blackstone earlier this month turned out not to be the acid test that many hoped.  Because they couldn’t get the ratings they needed, Blackstone’s executives structured the deal not on the value of the rental leases, as expected, but on the value of the underlying real estate, a safer and more traditional pricing strategy called “Remick.”  (See Blackstone and the “Raters” Duke it Out).

Whether you’re a fan of the hedge funds or not, simple arithmetic suggests they could be a significant future market for SFRs if they can figure out how to turn former foreclosures into golden eggs on Wall Street.  Can other hedge funds replicate the Remick approach and thrive?  Will the raters come around with time and management data to be in a position to rate enough future securities to create a bustling market in single family rentals?  The jury is still out.

5. Hedge funds and multifamily developers are suddenly cutting production.

Some surprising numbers crossed by inbox in the past two days.  The first came from RealtyTrac, which reported a sudden decline in hedge fund purchases (Hedge Fund Purchases Plummeted in October).  Institutional investor purchases in October were lower than they were a year ago and represented only 6.8 percent of all home sales in October, a sharp drop from a revised 12.1 percent in September and down from 9.7 percent in October 2012.

Had Blackstone’s competitors read interpreted Blackstone’s trials with the ratings agencies as bad news for their plans?  Had they grown tired of paying full price for homes off the MLS or had they simply run out of properties to buy or cash to buy them with?

In addition, the National Association of Home Builders had some surprising news today about multifamily construction.  The Multifamily Production Index (MPI), released today reached 54 in the third quarter, seven points lower than a spike in the second quarter.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100.  The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Do the hedge funds and big multifamily developers know something that the rest of us don’t?  Time will tell whether any significance to these reports is.

As I recovered from a painful week, I was left to ponder this quote from Lindsay Machak’s provocative piece in Multifamily Executive (Is the Single-family Rental Market Built for Success?).

“The fundamentals that gave birth to the single family rental business are now turning the other way… home prices are beginning to rise, credit will loosen for entry-level homebuyers and the economics justifying the entire trade continue to become less compelling.  It simply becomes too expensive to grow one’s portfolio when the economy is in recovery mode, much like investing in distressed debt.  While existing owner/operators that have already amassed portfolios will benefit from their rising value, I expect to see a decline in the overall business as these operators eventually choose to exit through individual asset sales,” said Bobby Lee who is President and COO of the Los Angeles-based JRK Property Holdings Company that manages hotels and apartments.

And this one, from BiggerPockets’ Josh Dorkin when we released the Bigger Pockets/Memphis Invest survey more than a year ago.

“Though housing markets are changing across the nation, investors are still seeing great opportunities.  They will certainly continue to be major players in the nation’s housing economy for the foreseeable future.”

I think I’ll vote for Josh on this one.  After all, if change doesn’t kill us first it will surely make us stronger.  If small real estate investors are nothing else, they’re survivors.
Photo Credit: International Real Estate Listings

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Steve:

    I always enjoy your posts, thank-you,

    I do struggle, and frequently fail, trying extrapolate the data to the Canadian market – since our national real estate market is only about the size of California, the lesser scale, combined with historical differences towards saving & home ownership (which are disappearing), sometimes means our market does not follow … even when it should/needs to {i.e. we are long overdue for a correction as real estate (SFH) prices are growing at an unsustainably faster rate than family income}

  2. Sara Cunningham on

    Very interesting article. At the present time we have invested only in single family rentals. I do believe in some markets there will be a decline, so it is imperative that you invest in markets that are likely to sustain potential renters. We have purchased properties in areas where there are high rates of immigration such as the Hispanic market, in the hope that this sector will continue to expand.

  3. Nice article Steve. I love all information provided.

    I won’t judge anything off what the hedge funds do. I think are in it for the short term unlike most individual investors buying sfr for rentals. I also don’t think they understood the difficulty in maintaining a nationwide property management network that could handle high volume. When they are paying full retail it’s not the same as an individual waiting for great deals.

    Maybe I misunderstood, but if the labor force goes down why would that decrease the amount of jobs and immigration? Wouldn’t the amount of jobs be mosty independent from the labor force volume? If we have a smaller labor force I think that would open up more opportunity for immigration to fill the need for workers.

    • Hi Mark;

      Thanks for your kind comments.

      I agree with your observations on the difficulty of managing a national property management network and thed diferencences between managing a large bumnber of comerdcial or multifamility buildings spead over a large area and single family rents. This is the issue tha has kept them from creating a secondary market to date and the question now is whether ‘renick” struyctyring will save their bacon. As I rote, even if the first Blackstone deal succeeds, I think that the jury is still out.

      Labor forces decline BECAUSE there are fewer jops. They are tightly linked. It’s hard to buy or home or lease an apartment without a job. When jobs decline, labor forces move away and housing demand plummets.


  4. I wonder to what degree these forecasts will make the power elites argue for increasing the immigration rate (which is already at nation-altering levels)?

    As technology and outsourcing transform the employment landscape, the elites stubbornly continue to import low-tech workers and laborers for whom there simply are not enough jobs.

    Mass immigration is like demographic QE. At some point, we’re all going to have to pay the price as a country. And it won’t be pretty.

    My rentals are in wealthy communities where there is still high demand.

  5. Hard to know what to do with these signals – no clear guidelines. I would think that most investors would just want to make sure that all their numbers are very conservative – that way even with a stall or downturn in rents you can still cashflow sufficiently.

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