The Housing Scene by Lew Sichelman

A Tale of Two Markets

Two relatively small housing submarkets are starting to show signs of strengthening. One of those markets: renters looking for more space, both inside and out. The other: people looking to get away from it all, if only for a few weeks.

Renters should soon see more opportunities to lease brand-new houses specifically built as rentals, while buyers of vacation homes are already flexing their purchasing-power muscles.

The built-to-rent market is, indeed, small. Currently, only about 6% of all single-family houses are purposefully built as rentals, working out to about 70,000 houses a year. But that’s not enough to keep up with demand, according to RCLCO, a Maryland-based advisory firm that says built-to-rent housing represents a big opportunity for its clients.

Other consulting firms have been saying the same. One, Meyers Research, has suggested that big master-planned communities should contain entire neighborhoods of rental houses. And the National Rental Home Council expects demand to surge.

“For many Americans, the pandemic has brought a new urgency to the search for housing, and many are discovering the benefits associated with renting a single-family home,” said Executive Director David Howard of NRHC. “Suddenly, living in a small apartment in an urban high-rise isn’t as appealing for families navigating the realities of working and schooling from home.”

If builders get the message, the trend will be just another step in the evolution of rentals as they break away from the traditional multifamily mold.

Originally, small-time investors with one or two houses dominated the sector -- and still do, for the most part. But since the recovery from the Great Recession, large institutional investors have acquired portfolios of unsold houses scattered across the landscape and turned them into rentals.

Some 12 million families currently live in detached one-unit rentals -- nearly as many as the 14.5 million who reside in buildings of 10 or more apartments. Now, Tricon Residential, one of the early investors in the space, is buying up single-family lots and partnering with local builders to deliver rental properties. American Homes 4 Rent, another large institutional owner, is doing much the same. And NexMetro has now closed on its 30th Avilla property, which are communities of one-, two- and three-bedroom homes.

RCLCO’s Gregg Logan and Todd LaRue say the demand is being driven by demographic shifts in which more households are in a stage of life where a house suits their needs best. But while these families would ordinarily be buyers, they are hampered by affordability issues that are not likely to dissipate anytime soon.

Afforability is just one factor, though. Renting offers much more flexibility than owning. Not only do renters not have to tie up their nest egg in real estate, they also can move from place to place without having to sell the old homestead. And they can sometimes find affordable rentals closer to city centers than they could find affordable, comparable homes for sale.

Meanwhile, second-home markets, especially those within a four-hour drive of major metro regions, are booming, according to John Burns Real Estate Consulting.

The sector is benefiting, Burns researchers say, from a rise in what they call the “YOLO” mindset -- You Only Live Once -- as people try to get away and enjoy life as safely as possible during the pandemic.

“Households who may have otherwise waited have decided now is the time to buy, often using funds that would otherwise be allocated to more traditional vacation travel,” they explained in a recent bulletin to clients. “Today’s buyers are showing more interest in lifestyle and use than rental potential and future appreciation.”

To prove their point, the researchers pointed to some remarkable sales figures from across the country. In July, the Sierra-Tahoe Multiple Listing Service logged its highest residential dollar volume in history, up more than 200% year-over-year. Sales at Long Cove, an upscale lakeside community south of Dallas, reached an all-time high in June -- then bested that in July. Pending home sales in Bend, Oregon, rose 150% year-over-year in July. Sales in Rehoboth Beach, Delaware, doubled compared to the same time last year, fueled by demand from New York and New Jersey. And in Worcester County, Maryland, sales were up 104% above last July.

The key to most of these numbers seems to be proximity. Most buyers of second homes, particularly those with school-age children, prefer to drive less than four hours to get there. They desire a getaway house to “invest in family,” and to provide a place of refuge for the future.

In some cases, since many parents can work remotely and children can learn online, the vacation spot actually switches places with the main residence. This flips the traditional “weekend home” model on its head, with families staying at their vacation home most of the time and occasionally traveling back to their primary residence.

Elements such as high-speed internet, home offices and learning spaces for children have become just as important in second homes as in primary ones, now that some owners measure second-home stays in weeks and months, rather than days.