We Lend LLC Managing Partner Ruben Izgelov explores the increasingly dynamic build-to-rent single-family market, looking into this industry segment’s near future.
The longtail impact of the pandemic is having profound effects across countless industries, and real estate is no exception. To be fair, most of these transformations were already in play prior to March 2020, but COVID-19 applied the afterburners. In fact, whether it’s online retail, meal deliveries or demand for rental properties, the transformations we’ve witnessed in the last 18 months would have taken years if not for COVID.
When it comes to rental properties, in particular, arguably the biggest trend to be turbocharged by the pandemic is build-to-rent, which refers to purpose-built, managed single-family communities that are placed directly onto the rental market.
Notably, the supply and demand factors underpinning single-family build-to-rent had been building up throughout the 2010s. Among them was the fact that Millennials were placing less emphasis on homeownership than previous generations, and house prices were simultaneously pushing many households into rentals. However, since the onset of COVID, working from home has become normalized. As a result, millions of city-dwellers have relocated to suburban areas, and coupled with record price growth, demand for single family rentals is skyrocketing.
But what exactly is build-to-rent, and why is this a big opportunity for those looking to invest in single family real estate? Let’s break this down.
The Rise of Build-to-Rent
Build-to-rent homes are created specifically to be professionally managed communities, often providing a residential experience with upscale amenities, much like a typical apartment complex that’s targeted at young professionals in urban areas.
And, although traditional single-family homes make up the bulk of these new developments, build-to-rent homes can come in all shapes and sizes. This includes single-story detached units, horizontal apartments (multiple units on one property that sometimes share common walls), small lot single-family homes, duplexes and even row homes.
Plus, despite developers and investors — especially institutional investors — racing into this space, there’s still plenty of room for growth. As such, the number of build-to-rent developments is expected to double by 2024, and investors are getting ready to put down no less than $40 billion in the next 18 months, according to Hunter Housing Economics projections.
What’s more, the rise of build-to-rent can be seen as a continuation of the investment seen in single-family rentals since the aftermath of the 2008 financial crisis. Back then, in an effort to remove loss-making assets from banks’ balance sheets, the government heavily incentivized Wall Street funds to acquire foreclosed properties — and they did so en masse. Major institutions such as Blackstone and Colony Capital bought up tens of thousands of units each, then placed them onto the rental market via management companies that they set up. Given the returns this business model has generated for these institutions, build-to-rent is a natural continuation of this trend: granting investors both scale and speed — factors that are curtailed when buying up existing inventory.
How Developers & Investors Are Responding
Thus far, about 30 states have experienced growth with build-to-rent projects, with significant developments observed in Phoenix, Atlanta and Nashville, among others. In fact, the nation’s fifth-largest builder, Taylor Morrison Home, expects that build-to-rent “could soon become 50% of [its] total business” — although the company didn’t disclose the current share.
Similarly, developer NexMetro launched its Avilla Homes neighborhoods in 2010 and is now present in Phoenix, Dallas, Denver and Tampa, with upcoming projects in three Texas locations. Like other build-to-rent developers, NexMetro focuses on luxury by providing residents with upscale amenities and facilities.
Moreover, according to NexMetro’s executive vice president, rent increases in the Avilla enclaves have shown rates of 6% to more than 11% — outpacing those in conventional apartments. Notably, about one-third of NexMetro’s renters are Millennials and 60% are single women.
Another example is developer Transcendent Investment Management, which stopped buying existing inventory and started building houses for rent in 2014. Now, the company manages more than 1 million square feet of single family homes.
Meanwhile, in terms of financing, Tricon Residential — an early investor in single family home rentals — entered into a joint venture of $450 million in 2019 specifically to develop build-to-rent planned communities of single-family homes. Likewise, American Homes 4 Rent has also moved into the build-to-rent space, acquiring lots from developers and partnering with homebuilders. And, this past June, Goldman Sachs granted a $300 million credit line to Fundrise, a real-estate investment firm planning to build a $500 million development of single family home rentals.
Finally, major fund KKR is also said to be exploring opportunities to acquire build-to-rent developments to add to its existing and diversified portfolio of single-family investments. It’s making a strong play in single family rentals due to what it describes as the “asset-light consumer” — Gen Z and Millennials who prefer to rent rather than own big assets.
Overall, what we’re seeing with build-to-rent in the single-family market mirrors similar developments in the multifamily space throughout the last two decades. However, the development of build-to-rent is happening at a far greater speed and scale now, given how comfortable many funds already are with investing in single-family rentals. This, coupled with a red-hot housing market, may shift consumer preferences and place pressing demands on suburban housing post-COVID.
Ruben Izgelov is the co-founder and managing partner of We Lend LLC, a New York-based private lender with a national reach focused on serving real estate investors by providing quick and low-cost capital.