By Ron Gonski
March 31, 2023
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With interest rates rising, the war in Europe, and supply chain challenges, the residential construction industry is again on the brink of losing another generation of labor.
Fifteen years ago, the Great Financial Crisis devastated the residential construction industry.
Starting in 2005 and over the next five years, the sector lost more than 1.5 million jobs, with tens of thousands of construction firms going out of business. Yet since then, during over a decade of unprecedented economic growth, the sector recovered only 940,000, a pittance for an industry that comprises a substantial portion of overall GDP. Current estimates still place the construction industry worker shortage at over half a million jobs, as overall demand for housing remains paradoxically strong in today’s unpredictable economy.
Many left the industry for good after the ruin of the crisis. But some returned, hoping not to be twice burned. With interest rates rising faster than ever, the war in Europe, and continued global supply chain challenges, the residential construction industry is again on the brink of losing another generation of labor.
This time around, however, the industry has an ace up its sleeve: single-family build-to-rent (BTR). This asset class did not exist during the crisis, but BTR now represents an increasingly significant share of residential construction. Savvy residential trades see BTR as an additional source of revenue during otherwise lean times. And trades that have already pivoted to BTR will realize a compounding advantage.
Unfortunately, a surprising number of trades and other industry veterans still need to be more familiar with the opportunity. Communities in this asset class typically comprise 50 to 350 residential units made up of some combination of single-family detached homes, townhomes, or “smaller, cottage-style units.” These communities are brought to market exclusively as rentals and are professionally managed.
The rise of BTR has introduced a new diversification opportunity for residential trades. Previously, for-sale home builders had a monopoly on single-family residential construction demand. Residential trades could only diversify by increasing their for-sale home builder customer base so that if one experienced trouble, the entire pipeline was unaffected. The insurmountable risk lay with the cyclical nature of the real estate market: Macro forces eventually impacted all customers.
BTR, on the other hand, creates demand for residential construction but is subject to much different market forces than traditional home building. Some of these market forces are even countercyclical.
For example, while recent interest rate increases crushed demand for traditional for-sale single-family homes, they also shifted significant demand to BTR communities. In fact, many prospective home buyers became BTR tenants. Millions of consumers are in a phase where a single-family lifestyle is simply imperative, even if doing so means renting.
Not surprisingly, as the BTR space has rapidly proven its strength as an asset class, trades who have sought this work have found a way to diversify their pipeline and reduce their vulnerability to macro-market whims. They have also found a more consistent and repeatable product, thus providing a fertile training ground for the next generation of labor.
But while the changing market, product types, and building techniques offer a fast-growing opportunity, many trades still need to make the investment required to get started. Early actors who do great work and form true partnerships with their general contractors and developers benefit disproportionately from this asset class's emergence. The space is new enough that there is still time to gain asymmetric market share and build proper generational businesses.
In hard times, BTR will not be a cure-all for the residential construction industry, but it can be a stabilizing force—if not a boon—for the proactive. Those who recognize the opportunity, invest early, and build expertise and relationships in this emerging asset class will be rewarded.
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