Part 2: Construction
There are numerous factors that affect whether or not a specific property or market will make for a strong investment, and our Research Services Team has narrowed it down to the 5 most influential factors. Last week, we discussed how job growth will affect single family rental (SFR) demand in 2016; today we’re going to dive into the supply side of things, and look at construction and vacancy rates.
Construction is one part of the supply equation, while vacancy rate is the other. Together they hang in a delicate balance. Should there be too much supply, many existing renters might choose to buy single family homes instead of renting, as increased supply dilutes home prices. In the same vein, a high vacancy rate decreases the profitability of SFRs for investors, as having too many available rentals drops the asking rent and demand.
The chart below depicts total U.S. housing starts, representing the start of construction of single family properties (both owner occupied and rentals), apartments, condos, and townhouses. In 2015, construction reached it’s highest level – 1.1 million starts – since the recession. On the surface, it’d be easy to think that this is a bad sign for single family rental investors, however, as we dig deeper and you’ll see that it’s just the opposite.
U.S. Housing Starts
A large portion of the new housing starts are Class A luxury apartments in urban cores, such as Downtown Los Angeles, San Francisco, and San Diego. In fact, apartment construction will surpass pre-recession numbers in 2016. The point is, that these urban high-end developments are not being built where the demand for single family rentals exists – the suburbs, and secondary and tertiary markets. In other words, the 360,000 apartments being created in 2016 will not significantly diminish the renter pool for SFRs.
Additionally, not all the construction that was started in 2015 will be completed in 2016, so the actual number of available housing will not increase at this rate. But for argument sake, let’s say that all 1.1 Million residential units will come online in 2016. Will that meet the demand for rentals?
U.S. Apartment Construction 2000-2016
Rental Demands and Vacancy Rates
The US has been seeing an increase in renter households. Of the estimated 1.4 million new households were formed between June 2014 and June 2015, 1.3 million were renter households. Thus the demand has outpaced the supply (1.3 Million vs 1.1 Million).
U.S. Household Creation
As the renter pool increases, vacancy rates drop and rents increase. According to the US Census Bureau, vacancy rates for rentals overall hit a multi-decade low in 2015. For 3 bedroom rental properties, vacancy rates dropped from 5.4% in 2014 to a miniscule 4.71% vacancy rate in 2015. This, in turn caused SFR rental rates to increase by 5% increase. The projections for 2016 are very similar, with vacancy rates remaining at a low 4.70% and a 4.2% increase in rents. Both are extremely good signs for investors.
U.S. Rents and Vacancies
While construction, occupancy/vacancy, and rent growth aren’t the sole factors supplementing a decision to invest in SFRs, they do show that the real estate market is presenting optimal conditions for investors. When you look at these factors in conjunction with employment growth, as discussed last week, you have a more accurate and informed picture of the market as a whole.
Stay tuned for an overview of how interest rates affect the single family rental market. In the meantime, register for a free account at Investor.HomeUnion.com to view cash flow-driven investment properties in solid markets across the U.S.