Thought Leadership
Embracing Competition: Why Single-Family Rentals Are like Jelly to Apartments’ Peanut Butter
Some people are afraid of competition, but just like Apple’s Eddy Cue, I think “Competition on anything is good, because it makes everybody better.” But here’s the thing: Some people in the apartment industry are concerned about competition from new single-family homes built specifically as rentals. Not me. I mean, that’s like peanut butter saying it’s scared of jelly.
Apartments and single-family homes are close substitutes, but they’re not perfect substitutes. There’s room for both in the market. Sure, there’s overlap between single-family rentals and apartments, but they’re still different, just like peanut butter and jelly. Sometimes it’s personal preference that you might choose one over the other, but under certain circumstances you might pick the one that’s not your favorite because it’s cheaper. The other things that may drive your decision are the location and availability of single-family rentals versus traditional apartments.
Obviously, both single-family homes and apartments have overlapping characteristics. They both provide warmth and shelter from the cold or the heat. They both have things you need such as electricity and indoor plumbing.
But if you really need to be in a more central location, you’re probably in an apartment. If you’re looking for more space or your own private yard, you’re more likely to be in a single-family rental.
Typically, single-family rentals are in a much more suburban location where there’s lots of land. From that standpoint, these rentals are competing more with single-family subdivisions than they are with apartments. In fact, often the same builders are building the same floor plans for single-family rentals and for-sale single-family homes in the same location. Some of these homes are kept as rentals by the builder, some are sold to real estate investors who rent them to individuals, and some are sold to end-user homeowners.
While single-family built-to-rent homes have been the focus of significant media attention in the last few years, the National Association of Home Builders found that just 7% of newly built homes started in 2022 were specifically for renters and held by builders. That’s not much of a market share, but it is a leap compared to the historic average of 2.7% of new single-family homes built as rentals. In addition, perhaps as much as an additional 5% of new single-family home starts were sold to investors to manage as rental properties. NAHB estimates that 69,000 new homes started in 2022 were single-family rentals – compared to more than 500,000 multifamily starts, more than 90% of which were apartments rather than condos.
To me, that shows apartment developers have very little to worry about when it comes to single-family rentals. Renters can choose peanut butter or jelly but there’s plenty of bread to go around for all of us.