Managers of single-family rental properties have been steadily raising rates in recent years, and have been able to boost rents higher with renewing tenants than with new tenants, a new report shows.
The report, published in February by Morningstar Credit Ratings LLC, was based on the experience nationwide of the single-family rental securitization market. The market is relatively new. Banks began securitizing income streams from single-family rental properties starting in 2013, with properties that had been repossessed after the housing crisis.
New tenants see lower rent increases, in large part, because landlords hold rents down to make sure that vacant homes are occupied as soon as possible
The collection of single-family homes held for rent in securitizations holds the promise for greater and deeper analysis of that market, as banks and rating agencies can view the patterns of thousands of properties in securitized portfolios.
Morningstar’s report found that as of November, the average single-family home where a rental agreement was renewed had seen a rent increase of more than 4 percent in the past year. The average home with a new tenant, by contrast, saw an increase of about 2 percent. At the same time, more than 80 percent of homes where rents had been renewed had seen an increase in the past year, compared to about 60 percent of homes where a new tenant had moved in.
New tenants see lower rent increases, in large part, because landlords hold rents down to make sure that vacant homes are occupied as soon as possible, Morningstar found.
“A further dive into rental changes in vacant to occupied properties shows that the length of vacancy plays a large role in the ability of property managers to increase rental rates,” the report stated. “The longer a property remains vacant, the more likely a property manager is to shift the focus from optimizing rent to simply getting the property occupied.”
Those trends can be partially reversed by seasonal factors, however. Renters renewing their leases saw smaller increases around the summer months, the report found. Vacant properties taking in new renters were able to achieve larger increases during those times.
Specifically, the average annual rent increase for an occupied property last July was between 2 percent and 4 percent, while the average increase for new occupants of a previously vacant property was between 4 percent and 6 percent. At the same time, the percentage of renters who saw an increase between both groups converged at about 80 percent.
The pricing power that landlords have during the summer with new tenants and during the winter with renewing tenants stems largely from families’ desires not to move during the school year, Morningstar said.
“A lot of people are moving in the summer,” said Morningstar Managing Director Brian Grow, who authored the report. “There’s a lot of demand for rentals… But in the winter, people don’t want to move, so they’re more likely to take a rent increase.”
Morningstar said its database of single-family rentals includes 91,000 properties and 28 months of data.
The pool of single-family rentals in securitizations could grow much larger in the coming years. There are about 15 million single-family rental properties altogether in the U.S., according to Grow.
Institutional investors still have properties they could securitize, “although the capital markets aren’t cooperating at the moment,” Grow said.
An even larger opportunity exists to acquire properties from small investors, Grow said.