As Millennials and young Gen-Xers realize they cannot easily afford a home of their own, many are turning to single-family home rentals instead, boosting REITs as a result.

The single-family rental REIT sector is fairly new, and has provided a 44.6% 12-month return as of April for its investors year-over-year, by far the strongest performance of any segment of the REIT market today, according to Calvin Schnure, senior economist at NAREIT, the National Association of Real Estate Investment Trusts.

Single-family home REITs emerged out of the wake of the housing crisis, when tumbling home prices and increasing rents coincided with the development of technology that could professionally manage vast swaths of real estate. The environment enabled REITs to buy up a thousand or more homes in a single neighborhood and professionalize the process of renting them out. It took a few years to convince the market to take the idea seriously though.

First the market had to prove that it could control the costs. In a traditional multifamily building, repairs are straightforward, Schnure said. An apartment building might have a thousand units but they are all identical, with identical dishwashers and plumbing parts so if something goes wrong, it is easy to fix. But with homes of different ages, and an array of appliances to look after, addressing single-family unit repairs is more complex and pricey. But new tech has alleviated that worry. With all of a house’s information in the cloud, information is easily accessible and parts can be ordered in seconds.

Booming Business

Single-family home REITs are starting to see real profits due to a rising number of household renters and continued rent growth. Gen-Xers are getting to the point where they need more space, including yards for their kids to roam and more room to hold their decades worth of accumulated stuff. “Some of the tenants actually can qualify for a mortgage,” Schnure said, but they prefer to keep their assets liquid, or like the freedom of being able to move if they want to.

One of the biggest movers in the single-family rental sector has been Blackstone. In January the company filed a $1.6B initial public offering for its single-family homes rentals company, Invitation Homes. The spotlight was then thrown on the sector when mortgage giant Fannie Mae announced it would back $1B in debt collateralized by rental homes owned by Blackstone.

Schnure didn’t comment specifically about Blackstone, but said the environment now is fundamentally different than when the housing bubble burst. There were 12 million single-family homes rented before the housing crisis and there are about 15 million now, though demand outpaces that. Developers are not building enough homes in populous regions to serve the people in those communities, Schnure said. Back before the housing crisis, there was a huge amount of speculative building. That is no longer the case.

The sector will continue to grow.

"It's no longer a niche market," Schnure said.