Single Family Built To Rent Market

Interesting information on the single family built to rent market from Stockton Williams at NCSHA:

The real estate story of the moment is single-family built-to-rent (BTR), which is actually a bunch of stories wrapped up in one.

A Wall Street story. Hunter Housing Economics projected $40 billion of debt and equity flowed into BTR last year, seeing potential annual production of 100,000 new single-family rentals in the next few years. Big investors are expecting average risk-adjusted returns of eight percent, higher than any other real estate sector, according to the research firm Green Street.

A Main Street story. National Association of Home Builders (NAHB) chief economist Rob Dietz, who has been on the trend for years, noted in 2020 that BTRs are “more in the middle of the U.S. rather than the coasts; almost one-quarter of SFBFR homes were built in Texas, Oklahoma, Arkansas, and Louisiana.” A Yardi Matrix analysis shows almost all the activity is in “secondary” and “tertiary” markets: “No SFR communities are being built in gateway metros.”

A home builder story. The Wall Street Journal reported last summer, “The country’s largest home builders…will put down some $40 billion more during the next 18 months.” Name-brand builders like Lennar, LGI, Meritage, D.R. Horton, Taylor Morrison, and Toll Brothers all are in the game.

An apartment developer story. Walker & Dunlop, the largest multifamily loan originator, calls single-family BTR “an increasingly popular concept within the multifamily industry [that] currently makes up nearly 10 percent of new homes built.” Top-15 apartment developers Mill Creek Residential and Continental Properties are reportedly entering the business.

And for housing affordability, a complicated story. Clearly, single-family BTR is adding some supply where it’s desperately needed. “The build-to-rent space kind of serves its purpose as being entry-level housing in a market where new homes at a reasonable price point are few and far between,” says economist Ali Wolf of Zonda Economics.

The median household income for renters in new single-family units is $77,000 — 48 percent lower than the median income for owners in new single-family units ($114,000), according to Harvard’s Joint Center for Housing Studies. This reflects BTRs’ generally smaller structures and lot sizes (and probably their locations in some markets), although NAHB research suggests BTRs “represent an outsized share at both the lower and higher level of construction permit values.”

Still, some single-family BTR development is happening in far-flung areas where experience suggests transportation costs could erode the housing affordability benefits. At a recent Urban Land Institute event, “panelists agreed that investors are currently considering BTR sites that would have seemed like longshots years ago.”

And notwithstanding the bullish growth projections — Zelman & Associates tallies current capital commitments sufficient to develop 315,000 BTR homes — the sector still faces the same barriers to scale as for-sale homes: labor shortages, materials costs, and regulatory red tape.

We agree with Continental Properties CEO James Schloemer: “It is too early to tell if this model can be developed at costs that will significantly serve the needs of missing middle households.”

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