Market Map: The Emerging Technology Opportunity in Single-Family Rentals

Today I’m excited to share our first SFR Technology Market Map which highlights many of the companies building across every segment of the SFR ownership lifecycle: A higher-resolution version is available for download here.

Across the United States today there are more than 47 million renter households. Historically, we’ve thought of rental housing as being primarily composed of apartment units — high- and mid-rise buildings in downtown corridors, or garden-style units in suburban areas. However, in the decade-plus period following the Great Financial Crisis (GFC), single-family rentals (SFRs) have been the fastest growing segment of rental occupied households, adding more than 4 million rental homes. Today, nearly 34% of rented units are SFRs, representing 16 million properties across the U.S.

What prompted this shift towards SFRs? There are a number of factors, including:

• Demographic and migratory tailwinds in recent years supporting demand for single-family housing.
• Limited construction activity in the single-family sector following the GFC, resulting in rapid home price appreciation and affordability challenges for first-time homebuyers. One recent estimate found that the U.S. requires up to 6.8 million new units to meet current housing demand.
• While the majority of SFRs are owned by small individual landlords, there is a growing universe of “sophisticated” operators of SFR portfolios, who developed the scale and track record required to attract institutional capital. Firms like Invitation Homes, Progress Residential, Blackstone and KKR have scaled to tens of thousands of units under management.
• The emergence of technology platforms to remotely manage portfolios of geographically distributed SFR properties.

The SFR segment has also generated attractive returns over the last decade — according to Deloitte, single-family rental income gains have “consistently outpaced those of conventional apartments — in some neighborhoods, from 6% to more than 11%.” And according to a recent study from Roofstock, average annual returns in SFR sector are “comparable to stock market returns and outperform bond returns, but with considerably less volatility.”

This track record of out-performance has sparked meaningful interest in the SFR category, particularly as other sub-segments of real estate such as office and retail have struggled. Institutional investors own only 3% of SFRs today, but have earmarked nearly $110 billion to purchase or build single-family-rental homes in the coming years, according Zelman & Associates. And for retail investors, the emergence of online investment platforms like Roofstock, Fundrise, and Doorvest has lowered the barriers of entry to becoming an SFR investor.

While the potential returns are attractive, most seasoned operators in the SFR category are well aware of the complexities associated with managing a portfolio of heterogenous, geographically dispersed homes. Many of these operators — from large scale SFR REITs to individual landlords — have come to rely on technology platforms to support their investment and management efforts.

In recent years, there has been a flurry of entrepreneurs building technology startups in the SFR category. That’s why I compiled the SFR Technology Market Map which highlights many of these companies building across every segment of the ownership lifecycle: property acquisition, finance, management, leasing and maintenance. This market map is not meant to be comprehensive (there are hundreds of startups in this segment), but should instead provide readers with a general sense of the most promising technology companies building products for SFR operators large and small.

We are entering a new wave in the SFR sector’s evolution. The industy really grew in scale and prominence during the years following the Great Recession, when wide-scale foreclosures and recessionary forces kept home prices low. After several years of rapid home price appreciation and rent growth (particularly over the last 24 months), investors in the SFR sector are now facing several market stresses, including: decelerating rents, a rising cost of capital and a shortage of homes available to purchase — which has slowed property acquisitions and related securitization deals for much of 2023. SFR transaction volume through November 2022 was down roughly 70% from the same period in 2021, according to an estimate from Strata SFR.

As rising costs begin to impact financial performance within the SFR sector, we believe that next generation of successful operators in SFR will take a technology-first approach to growing large portfolios of rental properties while simultaneously controlling costs and headcount. We also believe that technology will be critical in expanding access to investment opportunities in the segment beyond institutional-scale players.

There are several areas within the market map that we are particularly excited about — many of these companies represent the emerging platforms on which new operators in SFR will build. A few examples:

• “Full stack” property management platforms — several venture-backed startups have emerged in recent years that consolidate all aspects of property investment into a single platform. Companies like Mynd (a Thomvest portfolio company), Roofstock and Bungalow offer a new approach to property management, leveraging technology to streamline the process of finding, renting, and managing properties for both landlords and tenants. We believe that large investors will increasingly rely on these platforms to gain exposure to the SFR segment — for example, Invesco announced a partnership with Mynd in 2021 and Deer Park Road recently partnered with Bungalow to launch an SFR strategy.
• Next generation property management systems — Most operators today use legacy property management systems like Yardi, Appfolio, or RealPage. These systems are often difficult to use, lack interoperability, and require extensive customization to be viable for many SFR use cases. While displacing entrenched incumbent solutions can be difficult, we believe that emerging operators in this next wave will be hungry for new PMS solutions, particulary those that take a more open approach to integrations (i.e. open APIs, developer ecosystem, app stores). It’s critical that these PMSs integrate with the emerging ecosystem of point solutions and service providers so that real estate operators can manage their portfolios without logging into myriad systems, and harmonize all property-level data without manual data entry. Some incumbent PMS vendors are beginning to open their platforms — AppFolio recently launched an integration marketplace called Stack, which acts as an app store for third-party tools used by SFR operators. Propify is also worth noting — while not a PMS, the company enables easy integrations into existing management systems. For smaller-scale investors who self-manage their properties, there are a number of interesting new platforms that simplify property finances, including expense management, bookkeeping and taxes. Baselane (a Thomvest portfolio company) has emerged as an early leader in this segment.
• Maintenance marketplaces — repairs and maintenance are critical, and potentially expensive, aspects of property ownership. As investors expand their portfolios into new markets, its important that they establish consistent workflows around property maintenance and repairs in order to ensure a positive tenant experience. They also need access to competent and reliable service providers across every trade. Fortunately, several platforms have emerged to assist landlords with repair assessment, triage, and dispatching service providers when needed.

• Retail investment platforms — while the vast majority of SFRs today are owned by individual investors with less than 10 units, there are still meaningful barriers to entry for prospective real estate investors, including cost and complexity of management. Several startups have emerged that enable individual investors to access the SFR asset class. These platforms abstract away many of the complexities associated with property ownership and enable investing in across geographies. And collectively, they offer several distinct “flavors” for ownership — from fractional, passive investing opportunities (Arrived, Lofty), to single-asset purchases (Roofstock, Doorvest), to real estate fund investments (Fundrise). Ultimately, individual investors will be able to create rental portfolios similar to the way they build stock portfolios — giving more Americans a new way to build wealth within the real estate asset class.

• Rental construction platforms — One specific product within the SFR segment that is experiencing strong growth is build-to-rent (BTR), which are communities of single-family homes that have been purposely developed for rent instead of for sale. More than 25,000 build-to-rent units were under construction in in 2022, according to Yardi Matrix. A closer connection between SFR operators, institutional investors, and home builders may encourage more durable (and much needed) housing supply growth over the next several years, which has lagged household formation for nearly a decade.

We’re excited about the opportunity within the SFR technology space, and have already made a number of investments around this thesis, including Baselane, Mynd and Obie. If you’re building a company in the SFR category, please don’t hesitate to reach out.