The future is in single-family built-for-rentals, according to a new report

The COVID-19 pandemic has changed the way many Americans — whether buyers or renters — want to live, seemingly overnight.

Prior to the pandemic, giving up square footage in exchange for living in a luxury rental building in an urban location with over-the-top shared amenities like a rooftop deck with a pool seemed like a fair exchange for many.

Now, the idea of living in an expensive-yet-small apartment that has to do triple duty as an office and workout space while navigating elevator rides with potentially infected neighbors no longer seems like such a good idea, as many renters across the country seek to exchange high-rise living with single-family homes.

Based on current demographic trends, the single-family rental market will likely be undersupplied over the next 10 years, according to a new report from RCLCO Real Estate Advisors, suggesting the sector presents a strong market opportunity in the coming decade.

Currently, approximately 6% of new single-family homes are purpose-built for-rent, which would result in approximately 700,000 new units over the next 10 years. But according to the report, that might not be enough to meet demand.

Following the Great Recession, the share of single-family rental homes in this country expanded substantially due to an excess of for-sale inventory and a large vacant stock of newly foreclosed single-family homes. While the COVID-19 recession could potentially lead to more foreclosures and push more units into rental inventory, that’s not the trend to date.

Although large institutional investors started moving into rentals — a market previously dominated by small mom and pop investors — after the Great Recession, they still only own a small percentage of the single-family rental market. But the RCLCO report said the number of institutional investors actively moving into the built-for-rental space is growing, as high home prices are keeping many households, especially first-time buyers, out of the for-sale market.

An early investor in single-family rental homes, Tricon Residential established a joint venture with two global institutional investors several years ago to acquire an additional 10,000 to 12,000 single-family rental homes. In addition to acquiring homes from the resale market, the company moved into the build-to-rent space by purchasing moderately sized single-family lots, often located within master-planned communities, partnering with area builders to deliver rental homes, typically custom-designed, as a rental product.

American Homes 4 Rent, another large institutional owner of single-family properties, has also moved into the build-to-rent space recently, purchasing lots from developers and partnering with builders for the vertical construction.

Although millennial households are finally transitioning from renters to owners, their rate of homeownership is still below that of Gen Xers and Baby Boomers, thanks to the Great Recession, the rising cost of higher education and ensuing student loan payments. “While many lack the resources to purchase, they are attracted to the lower density and private outdoor spaces that single-family rentals offer, but without the down payment and commitment of ownership,” the report read.

New for-sale housing isn’t helping them out either. Due to increasing costs for land and materials, builders are more focused on the higher-end market where the margins are better.

Meanwhile, lack of inventory means home prices are unlikely to fall substantially or for any great length of time, the report predicted.

“Given strong household growth and a lower than historical ratio of housing production to that growth, recessionary impacts to home prices are likely to be short-lived and a lasting return to general housing ‘affordability’ is unlikely any time soon.”

Another emerging COVID-19 demographic trend is a growing preference for suburban locations, not only due to anxiety about living in higher density locations and/or concerns about relying on public transportation.

Even so, the report predicted millennials will expect their suburban location of choice to offer the same shopping, dining and entertainment opportunities that urban locations have to offer.

“We do expect suburban activity centers to make a come-back as the health crisis recedes given Millennials’ demonstrated preferences for locations with a sense of place and urban amenities,” the report said. “Given the anticipated undersupply of single-family rentals for the foreseeable future, this segment represents a strong opportunity for investors, builders and developers to create new rental home communities in a variety of formats, serving a growing market.”

Does it pay to become a landlord right now?

As unemployment claims spike along with coronavirus cases and laid-off workers struggle to make rent payments, many small landlords with mortgages to pay are beginning to feel the pain.

While there’s no doubt that owning a rental property comes with risk, most seasoned investors take a long-term approach. According to a recent survey from, 64% of investors who primarily buy investment properties as rentals said they planned to increase or keep their acquisitions, despite the pandemic.

A new report from RealtyHop helps potential investors determine how much risk they’d be taking on. The Property Investment Index details residential capitalization rates and net operating income across the 100 most populous real estate markets in the U.S. to help investors research properties from a landlord perspective.

This August, the average capitalization rate across the 100 cities was 3.61%, while the average property tax rate was 1.14%.

Detroit, surprisingly, had the highest capitalization rate of any city in the U.S at 14.39%. Rent prices there increased to a median of $852 per month across all listings, compared with $783 in the previous quarter. Despite rent prices rising, the city’s cap rate was tempered by an increase in real estate prices to $57,500.

Meanwhile, at 1.39%, San Francisco had the lowest capitalization rate of any city in the U.S., as rent prices in the Bay Area fell dramatically due to the pandemic. Despite the city’s low cap rate, occupancy in the Bay Area remains one of the strongest across the country.

In Boston, where average home prices are $750,000 and the tax rate is 0.73%, the aggregate yearly rent was $35,208 while average maintenance costs were $7,500 making the net operating income $22,260 with a cap rate of 3.26%.

Meanwhile, another new report from shows rent prices across the U.S. actually increased from mid-year 2019 to mid-year 2020. During that time period, studio apartments jumped 5.37%, one-bedroom apartments climbed 1.6% and two-bedroom units were up 3.46%.

In Boston, where coronavirus cases peaked in April, studio apartment rents were down 6.31% from April to June 2020, while two-bedroom rents were down 4.91%.

While the report noted that local supply and demand have influenced the change in rent prices, the pandemic and subsequent economic downturn are disproportionately affecting certain markets.

“Looking more closely at the rent price trends in these cities from April to June, it appears the 2020 changes are more indicative of current economic conditions than the national or even state-level trends,” the report said.