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In industry nomenclature: capital flows. In layman: follow the money.
To expand on the above, capital flows in this financial product (real estate) are largely driven by institutional investors as assets are more often than not privately owned. Now consider how decisions are made at these institutions, often through a mixture of portfolio managers, internal consensus, and external consultants. More importantly, consider how all of these parties are compensated and therefore the alignment of their incentives.
Let's use an example to better illustrate my point. Assume you are a portfolio manager at CalPERS. You've been working extremely hard and you've determined that there is a significant risk-adjusted opportunity in acquiring neighborhood retail centers that do not have anchor tenants, are service-orientated, with low credit. Think nail salon, donut shop, dry cleaner, barber, and so forth. Even better, a Sponsor has approached CalPERS with a strategy that is well aligned with your allocation thesis. Let's assume you convince the internal stakeholders and external consultants to move forward and allocate capital to this Sponsor. One of two things is going to happen, either i) your thesis was correct, the strategy was appropriate, and the Sponsor executed and your decision contributed significantly to the fund's outperformance for a year in the future or ii) either the thesis was incorrect, the strategy was not appropriate, or the Sponsor failed to execute and you are held to blame and most likely - terminated.
Now consider the current environment and how it would look if you moved forward with the above given the public perception around office and retail. Very few at these institutions are going to want to stick their neck out to move forward with such an allocation decision. After all, what is in it for them? They contribute to outperformance and they what, get a 4.0% salary increase while everyone else gets a 2.0% salary increase? Consider the alternative I've laid out above if things don't go well. Imagine the headlines of CalPERS loses $50 million in a retail recovery fund in 2020. The ultimate stakeholders (in this case, public employees in California) would be outraged and would demand heads roll.
Why am I laying all of this out? Because this is how the world works and as a result capital flows in real estate tend to follow a "herd mentality." Thus, right now capital flows are moving from office, retail and hotels into multifamily, industrial, and residential. The name of the game isn't making money, it is not getting fired and cashing in on that nice public pension at the end of the road. Thus, decisions are made to reflect that reality.
Lots of macro level tailwinds out there that get the institutions excited about the space. High levels of debt with millennials makes it harder for them to purchase homes, more and more people are renting by choice even when they could afford a home, less turnover in a SFR vs an apartment, >95% of SFR owners are mom and pop which typically means there's opportunity to run things more efficiently, its a very liquid market where you could sell a vacant home on the open market in a worst case scenario
There’s always been a delta between price per square foot between single family residential real estate and commercial real estate (multifamily, etc) and that gap is narrowing with additional capital flows into that sector. Sucks for first time home buyers. I feel for them.
Furthermore, SFR has the most liquid market in real estate under a certain price.
I'm not sure how price per sq. ft. of this product type is a relevant metric in this discussion. The price per sq. ft. variance, broadly speaking, more so reflects that residential land is more commoditized and entitlement and construction is easier and less expensive. Comparing a downtown office building to a suburban residential house is not a meaningful exercise.
Because there is a severe supply/demand imbalance:
https://www.wsj.com/articles/u-s-housing-market-needs-5-5-million-more-…
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