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What is build-to-rent? Everything you need to know




Feb 14, 2023

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For those looking for a home, the phrase “build-to-rent” pops up more and more.

For those looking for a home, the phrase “build-to-rent” pops up more and more. But what is build-to-rent? How does someone know if a build-to-rent home is right for them?


What is build-to-rent?

Build-to-rent homes are built and designed solely to appeal to the rental market instead of long-term home ownership. They come in various styles and options, making them an excellent choice for those looking to enter the rental market.


We talked to Tim Sullivan, the senior managing principal for Zonda Home, about the history of build-to-rent, what type of renter is right for build-to-rent, the amenities renters can expect, and the forecast for build-to-rent for the remainder of 2023.



Can you tell us a bit about the history of build-to-rent and where it came from?

Build-to-rent came from the Great Recession (from 2007 to 2009). There were so many homes going through foreclosure that those on Wall Street said, “Wait a minute, we can buy homes at less than replacement cost. This makes sense. We can get a yield of six or 7% on cost.” Maybe even higher in the early days.
From that, the single-family rental side of the world evolved. Then, as rent increased, some of our industry's bright minds said, “Wait, there's another alternative here.” So that became a second alternative, a purpose-built product.

The left-hand side shows a map. This is what any major builders would build: Single-family detached, three- to four-bedroom homes, six to eight units an acre. The critical thing is that it's mapped individually so each home can be sold separately.


The map on the right is effectively a pulled-apart apartment. It's higher density, up to 15 units an acre, smaller units one- and two-, sometimes three-bedroom units. But this became a hybrid between a pure multifamily stacked flat, five, eight, or 10-story, and a single-family home. If they had a baby, that's what it would look like.


The horizontal apartment is a multifamily product from the standpoint of if you and I wanted to buy that map on the right, we want to buy the fully baked and built project. We'd have to buy it all at one time. You can't peel off these units. But the hybrid, bungalow, cottage, and horizontal apartments have become their own asset class.


So, these are spoken about interchangeably. But the key to remember: If you can live in it, it can be rented. And there are all sorts of names for it. So, we tend to stick with build-to-rent because the most critical thing is how it's been mapped and then how it's sold.”



What type of consumer is looking at build-to-rent?

Anybody can rent – we've got renters in every community across the country. But when we look at these two solutions for housing, they self-select from the standpoint of the renter. So, when you think about a bedroom count, we will assume that one- and two-bedroom spaces will attract singles and couples.


When you think about a three- or four-bedroom house with a two-car attached garage and a backyard with space for animals and toys, that's primarily single-family. So, when you think about the products, the renter overlaps a little. Because you will see a three-person family in a horizontal apartment, and you will see couples renting homes before they buy.


It's pretty much every segment out there, but we have seen that there is a pull toward people finding new locations. So, moving from California to Phoenix is a great way to test-drive a neighborhood. And you don't have to live in an apartment with other renters beside, above, or below you.


Then there are also the baby chasers. When you think about the 55-plus market, they want to follow their kids because there are grandchildren on the way or already here. So, I think a huge opportunity that has not fully tapped into the 55-plus market. We're seeing it a little bit, but I think it's much deeper.”


What types of amenities can people expect in build-to-rent properties?

The single most important amenity for either renter type will be to be able to afford the monthly payment and the flexibility that renting allows. You don't have to have a down payment; you don't have to qualify. However, you typically must go through a background check, which you don't have to do when buying a home.


Then, when people have that flexibility, what are they looking for? Usually, it depends on their lifestyle. If they're dog owners, you better have a dog park. Over 50% of renters own an animal, typically a dog. So, doggy doors are vital, and having that little open space is key.


But you'd also find that most places will have a pool. There won’t always be a workout facility because a large facility must support that. If you're building 68 to 70 units, you’re probably not going to have a workout facility.


There might be a pool if it's single-family detached, but then rents will be slightly higher because they're bigger homes than one- and two-bedroom bungalows.


For those in a 55-plus market, the landlords often feel like they need a central facility for people to spend time, such as a small gathering space and a pool.


How has the popularity of build-to-rent changed over the last decade?

I argue that it's always been popular because if you think about families, there have always been people who rent by choice or need. So, it's always been a prominent segment.


But I think this purpose-built hybrid product, where we're building single-family homes on purpose to rent, we're building pulled-apart apartments on purpose. It's just an expansion of the opportunities. Its popularity has grown because of its history and how this segment began. It was a financial capital play. It was a way to find a return in a market that was down, buying assets and doing it below replacement costs.


Then it expanded into the knowledge and realization that people want the flexibility of renting a single-family home with that privacy element. So, I think both segments of single-family and multifamily products are here to stay. They just give another option for people to choose how to live and when they want to live that flexible lifestyle.


What's changed the most about build-to-rent in the last five to 10 years is the institutionalization of it from capital, development, and operation standpoints. Things are different because now there are significant amounts of money involved. There are real estate investment trusts and Wall Street-driven private equity that have formalized this space. So where ten years ago, it was largely by default to say, “Hey, we've got some extra homes, let's rent them.” Now, it's an entire community we're building them to rent. I think it's a very positive thing. But it's permanent because it's now considered an asset class.



Where and what are the trends for build-to-rent?

Phoenix is the laboratory right now. It’s incredible to see. A lot of markets are growing, but Phoenix is the big one. In terms of the kinds of trends, we generally see an increase in the size, meaning the number of units. I don't know if that will continue, but certainly, over the last couple of years, that’s been the case. Also, the size of communities is generally increasing.



What's the forecast for the build-to-rent market in 2023?

Here are a few key takeaways: The build-to-rent market is a permanent space, but it's not for everybody. Because capital is so expensive, most deals don't make a lot of sense right now. Costs are up; they haven't come down. Rents are leveling, and the cost of capital is double or triple what it was a year ago.


So, what does 2023 look like? I think it starts slowly, and we get to a place where costs soften. Then the capital markets might pull back a bit from their more aggressive expectation of returns.Then we should see deals done again. But right now, the market isn’t frozen. It's paused.



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