Build-for-Rent

Why Build-to-Rent is the Hottest Thing in Home Building

Originally posted by ConstructUtopia.com | Utopia Staff

When you visit the websites for single-family build-to-rent communities, you might not recognize the difference between these and for-sale neighborhoods. The images, marketing copy, and branding feel much the same as a for-sale community, with descriptions such as “You can feel at home in a neighborhood atmosphere where life is quiet and friendly.” Or “…discover front porches and winding lakeside trails that encourage strolling and conversation with your neighbors.”

And that’s exactly the idea.

Build-to-rent communities offer the lifestyle of suburban, single-family neighborhood living, just without the giant down payment and lifetime commitment. 

It’s that lifestyle (and, for many, the greater affordability) that has sent interest in build-to-rent skyrocketing over the last few years, and investors, developers, and builders are quickly tapping into an underserved and eager market. 

The State of Build-to-Rent

Interest drivers for build-to-rent reached perfect-storm levels this year, with affordability and generational preferences combining with coronavirus-driven lifestyle changes to sharply increase demand for this product.

“Build-to-rent is exploding faster than any other type of real estate,” says Brad Hunter, president and owner of Hunter Housing Economics, who will be presenting “Single-Family Built-for-Rent Strategies & Trends” at IBS 2021. “Demand for rental homes is growing faster than supply.”

“The Sunbelt is attracting the majority of the activity in this sector,” Hunter adds, “but there are strong opportunities throughout the entire country.”

‘Build-to-rent is exploding faster than any other type of real estate. Demand for rental homes is growing faster than supply.’ 
— Brad Hunter, Hunter Housing Economics

“Based on current trends, [we believe] the single-family rental market will likely be undersupplied over the next 10 years, despite the increased attention the segment is currently receiving. Of course, that could change if the number of units being produced increases dramatically, or if the COVID-19 recession leads to more substantial foreclosures pushing more units into rental inventory, but that is not the trend to date,” RCLCO Real Estate Advisors wrote recently. “Since the recovery from the Great Recession, the single-family rental market has evolved from individual units owned and rented out by small investors to large investors acquiring significant portfolios of scattered units to building new units specifically for rent, creating entire communities of single-family rentals with professional management.” 

The Great Recession helped eliminate the stigma of renting, says Don Walker, managing principal and CFO at John Burns Real Estate Consulting. Would-be renters are starting to weigh flexibility as an important factor in their home decision-making. 

There’s also more buy-in from municipalities. Jacque Petroulakis, executive vice president for NexMetro Communities, which develops luxury build-to-rent under the Avilla brand in Phoenix, Tucson, Dallas, and Denver, notes that build-to-rent serves an unmet need and increases product types. 

“You want a diversity of product offerings in your cities, but not all cities want a big box apartment complex next to single-family for sale,” says Petroulakis. “Here you have an opportunity for multifamily-zoned density, but with single-family application. There’s a lot of beauty to that.”

Single-family rental properties have proven incredibly resilient during the pandemic, says Dennis Steigerwalt, president of Housing Innovation Alliance, with premiums 10% to 15% higher than comparable multifamily projects. (Check out his recent Coffee Talk podcast chat with several experts on build-to-rent.)

communal outdoor space
Redwood Apartment Neighborhoods in Ohio feature single-story apartments in a traditional single-family neighborhood setting, including plenty of communal outdoor space.

Driving Factors

Perhaps one of the reasons that build-to-rent is surging is that it offers benefits for nearly every generation and life stage.

“Our consumer base is so diverse,” says Petroulakis, noting that in every market NexMetro builds in, Avilla renters include a mix of professional Millennials, move-up families and those in transition, and Baby Boomers. 

In many cases, and not surprisingly, it’s about affordability—build-to-rent is more accessible to those who want or need a single-family home but cannot yet afford to buy, particularly in areas where entry-level homes are still in short supply. This may be the case for some Millennials; these customers are still reeling from the economic crisis, but they also have a strong desire to move out of the city to raise their children. 

“Millennials are starting to form families finally; they’re 10 years late to the game,” says Hunter. “As they’re having kids, they’re starting to behave like generations before them. They want the suburbs in many cases.”

“Where they’re at psychologically and financially, and the supply-demand gap for housing, we have a perfect scenario in which this is a great alternative solution,” says Steigerwalt. “It’s financially in reach, it’s the life I want, and it’s the community I want my family in.”

For others, it’s not necessarily affordability, but the lack of commitment. Some Gen Yers and Gen Zers may be hesitant to put down roots, uncertain about where they want to settle down or where their jobs will take them. Rental homes allow them to experience a new place before making the bigger financial and emotional decision to buy a home there.

On the other side of the equation are active adults who are selling their large dream homes, investing the money, and renting closer to family or trying new places and lifestyles knowing they can change locations whenever they wish. 

All generations benefit from the lock-and-leave lifestyle of a rental, without the worry of replacing broken water heaters or power washing the deck on weekends.

COVID-19’s Impact on Build-to-Rent Housing

Over the last six months, the pandemic added its own set of drivers for build-to-rent. While the pandemic didn’t create the trend, Walker says, it did accelerate it.

One of the effects of COVID-19 has been a mental shift on the part of Americans as to where and how they want to live. Being confined to home most of the time means greater focus on creating a sanctuary and ensuring they have all the features they want. And increased working and schooling from home means many families are simply out of space to manage it all. Renting a single-family home gives them an instant square-footage upgrade—and outdoor space—without having to quickly pivot to a mortgage.

single-family outdoor space
Renters in search of outdoor space are finding it in single-family projects such as NexMetro’s Avilla Heritage in Grand Prairie, Texas. Photo courtesy NexMetro Communities

“The trend of people working from home was going on before, but now companies have figured out that it does work,” says Walker. “We think the work-from-home concept is going to be a longer-term trend.”

This means some workers may choose to move to their dream city, knowing they can keep their job. Build-for-rent allows them to try out new areas of the country before they buy. 

Advantages for Builders and Investors

Along with simply the heightened demand and potential ROI for build-to-rent communities, the product brings several advantages for builders, developers, and investors, both in and of themselves and compared to traditional multifamily rentals. 

Single-family renters pay more and stay longer, reducing turnover costs and the risk of bringing in bad tenants. (On the downside, that can make it harder for landlords to raise rents aggressively.) Pre-COVID-19, single-family rentals had a turnover rate of about 30%, says Walker, who says that’s much lower than the 50% that is typical of apartments. Families often want to keep kids in their existing schools, and they don’t have as many choices in the single-family rental market as young apartment renters might have.

Builders see construction advantages too. With greater control over the end product, projects go up faster and more efficiently; much as a commercial project might unfold, single-family for rent can get built in one shot versus a take-down schedule. Builders can eliminate the usual headaches and delays of buyers making choices to personalize their homes. 

“Eliminating the color-out process means builders can execute identical homes all the way down the street, which creates efficiencies and saves them money,” says Hunter.

Steigerwalt believes this is also why build-to-rent is going to drive innovation. Builders have the opportunity to create construction efficiencies, and that means introducing and investigating faster ways to pour foundations, panelize walls, and more to continually improve ROI. (Learn more in Steigerwalt’s article, “Understanding Build to Rent, Part III.”

understanding build-to-rent
For more on build-to-rent, check out the Housing Innovation Alliance’s recent  Coffee Talk podcast and article series, “Understanding Build to Rent.”  Sketch by @ayumibennett, courtesy Housing Innovation Alliance

It also may drive increased energy efficiency, as builders or investors seek to reduce costs of ownership on properties they retain and manage. 

Other monetary perks include potential capital gains tax advantages if the community is later sold. Owner/operators may be able to hire a leasing agent instead of a more highly compensated new-home salesperson. And, of course, single-family rentals generate recurring revenue. “You still have maintenance and operation,” Hunter says, “but you don’t have to build all over again to get money.”

And because renters want space but not too much space, builders can maximize lot sizes accordingly and increase density, if approved.

Obstacles to Build-to-Rent Housing

Still, build-to-rent is not without challenges, Hunter notes. In fact, there are many of the same hurdles as with for-sale communities, such as shortages of land and labor along with rising material costs. Hunter cautions that investors also need to tread even more carefully to secure land without overpaying. 

It’s also not a venture that you can simply jump into. Hiring a consultant such as Hunter Housing Economics or John Burns Real Estate can help you better ascertain the need and demand in the region as well as what products will do best. 

Tricor Contracting specializes in building build-to-rent homes and gets involved with investors as early in the process as possible. “There are decisions that need to be made early on—if you don’t approach it with the right lens early on you can put yourself in a world of hurt,” says Mitch Rotta, director of new construction. “If we can help guide people through the process in how to approach things while also being able to execute the work, it helps us secure early in the pipeline. We want partners that see the value in what we add.”

Originally posted by ConstructUtopia.com | Utopia Staff

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