Securitized Rentals and Vacancies Tick Upward



The annual summer trend of renters moving to a new home is following the normal pattern. While the children are out of school, renters tend to relocate. This observation is based on Morningstar Credit Ratings, LLC monthly trend report for single-family rentals securities (SFR). The report is an analysis of 23 single-borrower deals covering more than 87,000 properties. The July report reflects a relatively stable market.

After several strong years of consistently increasing rents and downwardly trending vacancy rates, the average vacancy rate ticked up again to 4.9 percent in June. Summer lease expirations pushed the vacancy rate higher for the third straight month across single-borrower, single-family rental securitizations. While the rate still remains low (below 5 percent), additional lease expirations could increase the rate in coming months. It could also indicate that renters are looking for alternatives to rising rents.

Back in March, retention of renters when leases expired was still increasing as people found it difficult to find lower rents for comparable properties in the tight rental market. For May, the latest month for which data is available, the rent increase for vacant-to-occupied properties was 4.6 percent, while the rent increase for renewal properties was at 3.9 percent. This illustrates that while rents continue increasing, increases tend to be lower when resigning leases compared to relocating. Renters are not finding rate relief by relocating. These numbers are mostly in line with or slightly higher than property-level RentRange® estimates (a broader market sampling).

For the most part, retention rates remain well above 70 percent with only one single-borrower, single-family rental securitization posting a retention rate below 70.0 percent and eight deals had retention rates at or above 80.0 percent.

The average loan payment delinquency rate ticked up slightly to 0.7 percent and four portfolios had delinquency rates at or above 1.0 percent, up from two portfolios the month prior. This remains very low in view of last decade’s foreclosure melt down but up ticks in delinquencies should always be on the radar of investors.

The picture of the U.S. housing market is out of equilibrium. In a balanced market, as rents increase, momentum shifts to homeownership. With home sale inventory remaining low and purchase prices steadily increasing, the option for renters to shift to ownership is extremely limited. With both rent and ownership costs steadily increasing, the new construction segment would be expected to kick into a higher gear. The current high cost of housing of both types combined with a lack of new construction can only lead to overall continued higher household costs being on the horizon.

Low housing availability with higher costs can be expected to lead to household consolidation. This happened during the foreclosure crisis when displaced households consolidated by forming roommate arrangements and multi generations of families lived together. The difference between now and then is the cost of consolidation. Then, costs were lower due to millions of foreclosures being vacant as well as a much higher rental vacancy rate. Now, the cost of both ownership and rentals are higher. However, this is true mostly for high-density population centers. The increase in household costs has not been nearly as dramatic in distant suburbs and urban regions.

For the full Morningstar report, click here.

Please leave a comment about your own experiences or if you have questions/comments about this article.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

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