According to the latest Single-Family Rent Index (SFRI) published by CoreLogic, a data and analytics company, the single-family rental (SFR) market is cooling down nationally. This downturn comes after almost 2 years of above-average SFR rental price hikes. The SFRI tracks SFR prices across the country and principal metropolitan areas. Molly Boesel, principal economist at CoreLogic, noted: “Annual single-family rent growth decelerated for the fifth consecutive month in September but remained at more than twice the pre-pandemic growth rate.” This is because many homebuyers are holding off on purchases due to high interest rates, which has kept pressure on rent prices and prevented a more significant drop in SFR rental growth — especially when compared with other areas of the real estate world, like single-family home values and various hard-hit commercial property types.

SFR Market Comprises Roughly Half of Rental Housing Stock

Single-family rentals comprise roughly half of American rental housing stock, but for numerous reasons, it’s hard to find quality adjusted SFR transaction data. This is mostly due to the longtime decentralization within the space. Multifamily is dominated by several large players like Greystar, Nuveen, and Essex Property Trust, while SFR has long been the province of smaller mom-and-pop investors.

But the SFR space is changing, with many larger firms like Invitation Homes and American Homes 4 Rent gobbling up single-family rentals from coast to coast. Their acquisitions largely target lower-density areas; the same ones that many remote workers and retirees migrated to during the height of the pandemic. When pricey apartments in Manhattan or San Francisco suddenly became less desirable due to pandemic pressures, and these out-of-the-way areas thrived.

Of course, what goes up must come down, and as pandemic pressures ease, we’re seeing the most significant price declines in these same areas, with Sunbelt states like Florida, Arizona, and Georgia leading the way.

Uncertain Outcomes and Dry Powder

September showed a negative monthly rent change for SFRs, resuming the historical seasonal pattern for the first time since the COVID-19 pandemic. As a result, we may be seeing the start of rent price growth normalization; however, the direction of the market is uncertain, with many large SFR players sitting on the sidelines.

With federal interest rate hikes at the highest level since the 2008 financial crisis, the cost of buying a home has significantly increased, leading investors to sit on cash reserves in favor of waiting out lower prices down the road. Notably, single-family sector heavy-hitter Tricon Residential recently reported it has $3 billion in capital set aside for future additional SFR purchases “when the time is right.” Similarly, Tricon’s competitors like Invitation Homes and American Homes 4 Rent – each of which represent 10,000+ SFRs across the US, are also slowing acquisitions as they take a “wait and see” approach to the projected growth in single-family rentals and reduction in buying costs.

Tricon expects to purchase as many as 850 homes in Q4 of this year, bringing their 2022 total acquisitions to 7,300 — significantly less than the 8,000-home projection made by the company in an earnings call this past August.

Despite the slow roll, Tricon CEO Gary Berman remarked that Tricon expects home prices to remain stable, maybe seeing another 5% dip from current levels. The Tricon honcho also does not see a “significant or difficult recession” on the horizon — but actions speak louder than words, and the previously rapacious firms now pausing or slowing acquisitions is not exactly a great sign for the short and mid-term direction of the SFR market.

The Future of the SFR Market

While it is unclear whether we are at the precipice of a major single-family home value decline, it’s clear that the space is forever changed. In 2021, institutions funded more than $2.5 billion in SFR acquisitions, and committed more than $60 billion in capital to buy SFRI homes, according to a report from Yardi Matrix.

In that same report, YM estimates by that the end of this decade, large institutions will own as much as 40% of American SFR units, dominating a market historically comprised of mainly individual owners and small businesses.

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