Single-family Rental: Rent and Vacancy Dynamics – Metros with low vacancy rates have faster rent growth
The single-family rental stock has grown by more than one-third over the past decade, and today there are as many rental homes in single-family properties as there are in large rental apartment buildings. While there has been a growing number of firms that specialize in single-family rental ownership, today it’s still the individual investor, often called ‘mom and pop’ owners, who own about 80 percent of the homes. (Figure 1) In contrast, about four-in-five large apartment buildings are owned by partnerships, corporations, or REITs.
Because of the growth and dispersed ownership of single-family rental homes, we wanted to explore how rent growth responds to demand and supply conditions. We used the CoreLogic Single-Family Rental Index to measure rent growth and the Census Bureau’s single-family vacancy rate series to gauge market tightness. (Figure 2) During the last 14 years, we found that the equilibrium vacancy rate for single-family rental was about 9 percent, meaning that when the vacancy rate was below this level rents were rising faster than other consumer prices. And when vacancy rates were above 9 percent, rent growth was slower than inflation in other consumer goods. To illustrate, as single-family vacancy rates have declined since 2014 to their lowest level in nearly 20 years, rents have grown nearly 3 percentage points faster per year than other consumer prices. On average, for each percentage point that vacancy rates were below equilibrium, rent growth was about one percentage point faster than inflation.
The relationship between lower vacancy rate and higher rent growth is also evident when looking across metropolitan areas. (Figure 3) Locales that had low vacancy rates, reflecting the limited amount of rental inventory relative to families looking for homes, also had faster rent growth. The shortage appeared to be particularly acute in high-cost cities along the Pacific coast, running from Seattle down to San Diego. Because of the dynamics between vacancy and rent, additional rental supply is necessary to moderate rent growth in cities with limited vacant inventory.
 The equilibrium vacancy rate is the rate consistent with zero real rent growth. A version of this relationship is ΔRt=g(Vn-Vt) where ΔRt denotes real rent growth, Vn the equilibrium (or “natural”) vacancy rate, and Vt the actual vacancy rate. The Consumer Price Index less shelter was used to convert the growth in the Single-family Rental Index into real growth.
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