What’s Behind the Growing Demand for Build-for-Rent Housing
Today’s rental homes are more than luxury high-rises, urban mid-rises and sprawling suburban garden apartments. Now they include one product barely recognizable as a multifamily property: build-for-rent (BFR) townhomes and single-family homes. While BFR homes vary widely in size, style, features, amenities and settings, these new single-family rentals share some powerful similarities. They are cheaper to build, command premium rents, see fewer vacancies and attract longer-term renters. These fundamentals make them prized assets with great long-term investment potential.
This property type, christened low-density rental housing by the Urban Land Institute (ULI), is evolving in response to shifting demographics. BFR homes are being built on tight urban sites and expansive suburban tracts as attached, semi-attached or detached homes, usually in planned developments designed to spur neighborly interactions among residents.
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BFR homes, like the one pictured above at AVA Madison, an Origin project in Tennessee, are filling a critical need for living space in largely untapped segments of the expanding multifamily market. In a recent report, ULI noted that renters such as aging millennials who need more square footage and outside space, empty nesters looking to downsize, and households in transitional life stages all benefit from this type of housing.
BFRs Are a New Spin on Single-Family Rentals
Single-family rentals are not new, of course, even if until recently they primarily had been managed by mom-and-pop landlords. In 2008, the sub-prime mortgage crisis gave institutional investors such as Blackstone the opportunity to enter the single-family rental market. ULI’s report calls today’s build-to-rent construction “purpose-built SFR” housing, in contrast to single-family houses acquired at resale. And the homes have as many monikers as property types. Along with BFR, terms include built to rent (BTR or B2R), single-family build to rent (SFBTR) and horizontal apartments.
By any name, the units offer advantages multifamily apartments lack. For starters, BFR units are bigger—at least 200 square feet and sometimes upwards of 600 square feet larger than the largest conventional apartment units. Often constructed as a single story, they also can rise up to four stories, and most have attached garages. In more suburban environments, unit features can include a fenced-in backyard for kids, dogs and outdoor entertaining. And they can include luxury amenities such as professionally landscaped grounds with show-stopping swimming pools, state-of-the-art fitness centers, lavishly appointed clubrooms, co-working spaces and onsite management.
Why BFR Now? It Expands Affordable Housing Stock
Compared to conventional multifamily communities, BFR homes are more expensive to build per unit because of their larger size, but cheaper per square foot—typically $180 to $220 in the Sunbelt regions. That’s because elevators or steel framing are not needed. The frame structures are relatively simple to design and can be completed in 12 to 15 months, with renters moving in immediately upon completion, compared with 22 to 24 months for a wood or steel-frame apartment project. And those faster turnaround times, with faster leasing velocity, lower borrowing and carry costs.
Not surprisingly, the number of BFRs under construction in 2022 has increased a whopping 106% increase compared with a 36% increase in 2021, home improvement site Fixr noted this summer. According to other data, that number could be significantly higher: BFR housing starts could reach 120,000 units this year, Fixr’s data analysis showed.
The National Association of Home Builders says a record 6% of single-family starts are retained by the builder for rental—69,000 units over 12 months—and another 5% are sold to rental investors. That may slow as interest rates rise. However, single-family starts are falling at a faster pace, according to Census Bureau and Housing and Urban Development statistics. Hunter Housing Economics forecasts the pace of BRF starts will pick up to 180,000 units by 2025. BFR housing is helping fill the gap between supply and demand for rental homes, which will take years to bridge.
Interest Rates, Diverse Demographics Drive Trend
For now, the 1,500- to 2,000-square-foot or larger single-family BFR units are supplementing the dwindling supply of starter homes that national homebuilders have been struggling to produce to keep pace with demand over the past 20 years. BFR developers work within local zoning requirements to deliver more density in each project than a typical single-family subdivision.
On another front, rising interest rates are pushing homeownership further out of reach. In 2019, the income needed to qualify for a starter home loan was $49,824, according to the National Association of Realtors—possible for many first-time buyers. Since then, the income that lenders require for a conventional mortgage has escalated to $86,880. Yet the median income of the prime buyer has only inched ahead, from $52,525 to $59,059, far short of qualifying for a loan or able to handle rising mortgage rates.
Demand for BFR homes comes from several demographics. MetLife Investment Management forecasts 11 million new households will be formed over the next decade in three main categories: families with children, office workers looking for work-from-home space and older empty nesters. The private real estate lender and manager predicts that BFR and other larger-format housing will command most new rental demand in this decade. All three groups will be looking for two- to four-bedroom homes with 1,000 to 2,000-plus square feet of space. If homes of this size are even available, many prospective buyers will find them unaffordable.
Four Origin Projects Tap BFR Demand
Origin has partnered with experienced local sponsors to invest in four build-for-rent projects. The variety of projects suggests the distinctive range of the BFR landscape:
Preserve at Star Ranch (Growth Fund IV), 310 single-story units in Pflugerville, Texas, a northeast Austin suburb. The 30-acre project with co-general partner Guefen Development has mostly two-bedroom units targeting families and retirees. The largest unit, with three bedrooms and 1,258 square feet of space, would rent for $2,150, or $1.71 per square foot.
AVA Gainesville (QOZ Fund II), 72 houses and 159 townhouses in Gainesville, Ga., northeast of Atlanta and near Lake Lanier off I-985. Initial plans calls for single-family cottages with minimal front and side yards, plus townhouses, on 25 acres. A four-bedroom house, the largest in the plan, is expected to rent for $2,559, or $1.33 per square foot.
AVA Madison (QOZ Fund II), 106 houses and 93 townhouses in Madison, Tenn., north of Nashville. A stream runs through the 55-acre AVA Madison site off Interstate 65. A pool, dog park and green space contribute to the community atmosphere. The biggest, at 2,100 square feet and four bedrooms, is expected to rent for $2,800, or $1.33 per square foot. Atlanta’s TWO Capital Partners is the sponsor for both AVA projects.
277 Clifton (Growth Fund IV), 75 triplex and 28 townhouse units just off I-40 in east Atlanta. The project will build urban rowhouse and triplex buildings on 4 infill acres. The flat-roof triplex configuration consists of a first-floor garden unit and two three-story units with rooftop terraces. A three-bedroom, 1,696-square-foot rowhouse would rent for $3,257, or $1.92 per square foot. A clubhouse, pool and other features give both projects the leisure amenities of a multifamily community. Atlanta’s Urban Realty Partners is the sponsor.
Meeting the Demand
BFR assets are likely to remain attractive to investors for quite some time to come. With interest rates remaining high, single-family rentals are a strong option for many of the 87 million households that the NAHB estimates cannot afford the median-priced new home.
For the past two years, total returns have exceeded 50% for single-family rental REITs, the trade group Nareit said. With BFR homes commanding higher rents than comparable apartments, BFR investors will benefit from the continuing pressure on homeownership. Origin Funds are providing a rental alternative that is changing the face of multifamily housing.