June 15, 2023
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Is the sector benefitting from prohibitive housing costs or offering would-be buyers an alternative?
In a year rife with challenges to all asset classes, single-family build-to-rent communities have been a case study in adaptability.
Boosted by increasing demand, suburban BTR projects appeal to a diverse array of renters. Due to their relative affordability for the amount of space they offer, the communities have become a darling of the multifamily world. Investment in the sector has also attracted attention as a signifier that would-be homeowners will choose to rent for the time being.
Addressing the demand
The $4.4 trillion sector’s fundamentals reveal stability as real estate faces a gloomy economic horizon. Data from an April 2023 report form Yardi Matrix, as well as a mid-year 2022 report from Berkadia, shows that average rents have increased by $6 to $2089 through April of this year, while deliveries in communities of 50 or more homes in 2022 reached a high of 14,581 units. This year’s numbers remain on track to match or surpass last year’s, according to the report. Occupancy rates remain at a cool 95.5 percent.
The types of individuals most interested in these offerings come from a diverse group, from Millennial couples to transitional households and even retirees looking to downsize their living space, Todd LaRue, managing director of RCLCO Real Estate Consulting, detailed.
What these groups share is the desire to “have the benefit of living in a single-family home without the mortgage or maintenance responsibilities that come with homeownership,” said LaRue, noting that this scenario “is appealing to many.”
Where the physical characteristics are concerned, residents most like the green spaces and private garages, amenities that have grown in popularity as more people have continued to work from home. Mark Alfieri, CEO of MORE Residential, sees such offerings as providing the offerings of a traditional single-family home, with the added value and stress-reduction of traditional multifamily property management services. “Unlike an apartment, you don’t have anybody living above or below you; you have much more privacy, and the most attractive features are garages and backyards, it’s what people are looking for, and it appeals to a wide variety.”
Additionally, specific aspects of the communities themselves have proven to be highly adaptable to trends within a given metro, those in line with both renter preferences and economic fundamentals. According to Timothy Savage, a clinical assistant professor at the NYU Schack Institute of Real Estate, in comparison to other property types, where adjustments to rent, or development changes are a much more drawn-out process, single-family rentals “have the ability to adapt a property much more rapidly, tailoring to local markets.” For example “If you think about (changes to) asking rents for a unit in Tallahassee, you can adapt much more rapidly,” he said.
To Andrew Barbakoff, vice president at PCCP, the physical characteristics such as the green space and privacy of homes, as well as the adaptability of the developments in comparison to both traditional multifamily and homeownership, offer the “best of both worlds”. Renters can “have the flexibility and maintenance-free living provided in an institutionally owned/managed community that provides the pride of living in your own home, but in a live, work and play area otherwise unaffordable given high interest rates and tailwinds in the for-sale retail market,” said Barbakoff.
These trends extend directly into the development strategies themselves. Middleburg Communities’ development strategy, accounts precisely for these differences “People want to be close to employment nodes, the want to be near good school districts, they want access to essential services and they want to be in higher growth areas,” Christopher Finlay, the firm’s CEO, told Multi-Housing News. “We target those markets and we have seen that this is where the success has largely risen.”
PCCP makes a direct connection between the two in its developments, following an analysis of fundamentals of traditional multifamily considerations, coupled with those of single-family feasibility.
“We generally underwrite a rent versus own analysis for all of our communities to get a better sense of how our rents compare to the expected payments in homeownership,” said Barbakoff.
Sources of the new BTR demand
The sources of such demand mirror historic and ongoing migration patterns, driven by employment opportunities and overall lower costs of living. Mirroring nationwide migration patterns, demand for single-family rentals has sprouted primarily in the Sun Belt, with states such as Arizona, Florida, Texas, Georgia and South Carolina attracting tens of thousands of new residents, alongside a great deal of single-family rental investment and development focus. According to data from a March 2023 report from the U.S. Census Bureau, the top ten fastest-growing counties are all in the Sun Belt, attracting on the order of 358,861 new residents.
Many high level-developers and investors, including those not historically involved in the sector, have taken notice. Institutional investors, banks, boutique developers and even service companies have allocated considerable capital and personnel to the region. In February of this year, AJ Capital Partners, created an entirely new single family development subsidiary focused on the building communities in the Southeast. At present, the venture has 876 units under construction across four communities, in addition to plans for four more developments.
In September of 2022, Tricon Residential, announced a collaboration with the Arizona State Retirement system in a $950 million development venture for 2,500 homes in the Sun Belt.
Alfieri attributes the growth by both population and industry interest towards the regions’ job growth, which has been bolstered by corporate relocations and industrial investment. “It’s what we, and most developers focus on; (Texas, Florida and Georgia) are ranked first, second and fourth in job growth,” he said.
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