The single-family rental home sector has been faring well during the pandemic. One sign of the sector’s appeal: J.P. Morgan Asset Management and single-family rental home REIT American Homes 4 Rent are partnering to invest $625 million in this space.
But what about its counterpart asset class of multifamily? Its headline news has been all about whether tenants are paying their monthly rent. So far, they are but many analysts expect defaults to increase as the economic turmoil continues.
The problem for multifamily is that its fundamentals are too strongly correlated to job losses for the sector to be completely resilient to the pandemic, according to comments John Pawlowski, senior analyst of residential at Green Street Advisors made during a recent webinar the company held.
For that and other reasons, Green Street 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, he said.
Considering that multifamily has been the perennial darling of the commercial real estate sector, this is an eyebrow-raising prediction. Pawlowski made down his case during the webinar.
For starters, the magnitude and velocity of the recent job losses is nothing that institutional landlords have ever seen. Compared to previous downturns, “there are a lot more people exiting the labor force now.”
Another factor, which is not related to the pandemic but comes at a very inconvenient time, is shifting demographics. They are not as supportive of multifamily as they have been in other recessions, Pawlowski said. “This will be the first year of a net decline of 25-to-29-year-olds in the country and a broader deceleration of 25-to-35-year-olds”, a trend that will lead to a more gradual recovery for multifamily, he said.
Also the multifamily supply pipeline was very full as it entered this latest recession. “There is a good two years of supply that needs to be absorbed, which will lead to an evaporation of landlord pricing power,” Pawlowski said.
All told, Green Street is predicting a 6% decline in multifamily NOI for 2021, a deeper trough than earlier recessions, he added.
Ultimately, though, multifamily will emerge from the slowdown with a reputation relatively intact among investors, Pawlowski also said. “When dust settles on this downtorun investors will still be able to use the resilient label for apartments versus other big property types.”
But in the meantime, single-family rental homes will be performing better than the apartment asset class.
“We are betting that for the next two-to-three years single-family rental homes will outpace multifamily in rent, revenues and NOI growth,” he said.
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. For instance, Pawlowski 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.