Berkadia VP Jeff Coles on Why Single-Family Rentals Are Trending
Berkadia VP Jeff Coles on Why Single-Family Rentals Are Trending
High lending rates and lingering economic uncertainty have slowed the housing market, yet the market for single-family rentals remains strong. According to Berkadia, approximately one-third of all renters live in single-family rentals; this figure includes those living in scattered-site single-family rental (SFR) units and planned communities of built-to-rent (BTR) units. SFR and BTR starts are increasing year over year, and multifamily investors have taken notice. “There’s a demand for the SFR/BTR,” says Jeff Coles, Washington-based Vice President of Client Services at Berkadia, “and we’re seeing investors diversify their portfolios as a result.”
In recognition of the evolving marketplace, redIQ is adding support for single-site SFR assets to its industry-leading underwriting tools. Below, Coles shares why this asset type is having its moment, how his team evaluates a prospective deal, and more.
redIQ: What multifamily and housing trends has Berkadia observed in recent years?
Jeff Coles: We’ve seen a change in consumer demographics. Millennials and Gen Zers are choosing to become renters, or what I call commitment-free consumers: They like having the flexibility to move. For boomers, renting offers financial flexibility. For people priced out of the market, renting is easier than buying; a rental payment can be two-thirds of a mortgage payment. Migration patterns have also changed. People are moving from dense cities to the suburbs. Families might need office space at home for remote work, or they realize they can afford to rent in a better school district while getting more amenities and space.
What attracts investors to the SFR asset type?
Private investment groups are facing less competition from institutions and REITs for this asset — for now. This space has outside rent growth and strong operating fundamentals. The properties have higher retention rates and multiyear leases, which results in lower operating expenses. Operators have exit optionality: They can sell the units back to retail sales, or they can create a bulk portfolio and sell it to become rental assets for someone else.
Have SFR and BTR assets become more sophisticated on the backend by, for example, having more standardized financials for institutional investors?
Institutions entering this space early on realized they had to build their own management systems to underwrite SFRs in a standardized way to acquire these homes from the retail market. Berkadia works with these firms, but we cater ourselves more toward the BTR sector because it operates more like conventional multifamily, with standardized underwriting. With the standardization, you can conduct comparative analyses between property types and geographic locations as well as predict operating costs, rent growth, yields and how operations and rent growth affect yields.
Have homebuilders changed their business strategies in response to the increasing interest from investors?
Homebuilders tend to focus more on units sold than pricing. Their first goal is to sell out their locations and keep their pipeline moving. Depending upon market conditions, they might be able to sell at a higher price to a market operator than a traditional retail sale. Other times, selling in bulk would result in a discount, but the builder limits their future risks. Generally, if a homebuilder is making money and keeping their pipeline moving forward, they’re happy.
What types of deals does Berkadia look for? What makes one more promising than others?
We provide three lines of service — investment sales, lending and equity placement services — and we all work in collaboration. Our advisers follow what meets the demand for our clients. Institutions are looking for pre-stabilized and stabilized assets. As their demand for the SFR product type grows, we’re finding opportunities in many forms to work with them. Some pre-stabilized deals are forward deals, and they’ll take down the property in phases. Some want programmatic relationships: They’re looking for equities, like a qualified builder, so they can gain scale quickly in this space. Others seek portfolio acquisitions.
What technologies do you use in your everyday work?
The SFR/BTR space has few advanced technologies currently available. A couple of third-party consultants produce great reports, but they have limited access to information and analysis in this space. Besides them, I use Berkadia’s proprietary applications, which are backed by our $400 billion in loan servicing, investment sales and mortgage banking efforts.
How do you anticipate that redIQ’s product expansion will benefit your team and other redIQ clients?
redIQ will be a differentiator in our product offering and give us an ability to penetrate the market in a more efficient manner. It will be transformative to the way our clients can underwrite deals, analyze opportunities to improve yield and discover actionable insights and operational trends.
redIQ Now Supports Single-Site, Single-Family Deals
redIQ is excited to announce support for single-site, single-family rental assets in redIQ. If you’re a redIQ client and would like to learn more about this functionality, click here or contact your Customer Success Manager. If you’re not a redIQ user, sign up for a demo today to see what redIQ can do for you.
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For over ten years, redIQ has provided a comprehensive and dependable underwriting service for multifamily acquisition teams, brokers, and lenders focused on mid and large-size assets. redIQ’s solutions lead the industry and support the full underwriting process, from standardizing financial documents to producing a final valuation. With our system, analysis takes less time and decision makers can move forward with greater confidence. redIQ users can close more deals, produce better returns, and spend less time worrying about downside.
