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The Strong Case for Investing in Single-Family in 2020

The diminished appeal of urban living in costly metropolises like New York, Chicago, San Francisco and Seattle is making this a good time to invest in single-family homes. That’s the word from both real estate agents on Main Street and analysts and executives talking to Wall Street.

In the wake of the pandemic, urban-dwelling millennials are expected to start looking for more square footage in the suburbs but are more likely to rent than to buy, presenting opportunities for investors to earn rental income, Candace Adams, CEO & President of Berkshire Hathaway HomeServices New York, New England and Westchester Properties, told Mansion Global.

What kind of homes do millennials want?

“Millennials want to have more space, but they don’t want the responsibility of owning,” Adams said. “Uncertainty makes people more apt to rent, not knowing where the job market might land them. So it’s a fabulous time to move money into real estate as an investment, as opposed to financial markets.”

Citing analysis by John Burns Real Estate Consulting, Forbes real estate columnist Dima Williams writes that “millennials – both first-time home buyers and up-sizing young families – are seeking new homes to replace their currently crammed spaces or escape apartment buildings that preclude social distancing.” 

She continued, “This new focus on the home is arguably already pushing these city dwellers… toward the suburbs and secondary, less-populated cities, where homes are cheaper.”

The case for the single-family rental home sector is not just anecdotal. 

REITs report increasing demand for single-family rentals

“Stay-at-home orders tied to the COVID-19 pandemic have not tamped down the demand for single-family house rentals, executives from two REITs said in recent first-quarter earnings calls,” GlobeSt.com reported

Dallas Turner, president and CEO of Invitation Homes, said occupancy climbed to a record-high 97.2% in April. “Residents have been moving into the company’s properties at the same rate as last year and at a faster clip than they have been moving out,” he said.

“We like our high-quality, sticky resident base, and we believe that the ripple effects of this pandemic could make the option to lease a single-family home even more attractive,” added Invitation Homes executive vice president and COO Charles Young.

On the other REIT earnings call cited by Globe St.com, American Homes 4 Rent CEO David Singelyn told analysts that demand for single-family rental homes is increasing as would-be buyers are postponing or canceling purchases during the economic downturn. 

“Single-family homes are also a draw to residents living in multi-family housing who are now looking for lower-density options in light of the pandemic,” he said.

In a further sign of confidence in the sector, a week after the call, American Homes 4 Rent announced a joint venture project with J.P. Morgan Asset Management to deploy $625 million of equity and develop approximately 2,500 purpose built single-family rental homes across multiple high-growth markets in the West and Southeast.

Demographics and supply favor the single-family rental sector

Another strong endorsement comes from Green Street Advisors, the preeminent independent research and advisory firm concentrating on the commercial real estate industry in North America. Green Street senior analyst of residential John Pawlowski made a strong case during a recent company webinar. 

“He is betting that for the next two to three years, the single-family rental home sector will outpace multifamily in terms of rent, revenue and even NOI growth,” Globe St.com reported

“So far, operators report that their pricing power and occupancy levels are faring well,” Pawlowski noted. “But more importantly, demographics and supply favor the sector right now.”

He pointed out that there are few trade-down options for a family living in one of these homes with a mid-FICO score and a desire to stay in a good school district.

“We don’t see any meaningful cracks in single-family rental homes’ fundamentals,” he concluded.

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