How Build-to-Rent Communities Adapt to Current Housing Demand

Build-to-Rent Communities Adapt to Changing Demand

The early 2020s marked a significant shift in the housing industry as the global pandemic prompted individuals to reassess their living situations and locations. The U.S. witnessed “the Great American Move”: Households and businesses sought more affordable locales, frequently opting for homes with yards and more space, and which were farther away from employment hubs.

As a result, U.S. housing prices have risen dramatically, with the median home price increasing by 29% over the past three years due to the increase in demand as well as supply chain interruptions, labor shortages and permitting delays caused by the COVID-19 pandemic.

The increase, coupled with higher mortgage rates, has brought the issue of affordability—always key in purchasing decisions—to the forefront. According to a survey by John Burns Real Estate Consulting, more than 67% of households that rent cite the lack of a down payment as the biggest hurdle to homeownership.

In the same survey, 44% of single-family renters with household incomes over $50,000 choose to rent. They gave reasons including more flexibility and fewer maintenance and financial responsibilities than they would have as homeowners.

Why Do Renters Continue to Rent?

Note: Survey of 1,347 U.S. homeowners and renters ages 18 and over with household income of more than $50,000 who believe that homeownership is important.
Source: New Home Trends Institute by John Burns Real Estate Consulting LLC

For single-family renters who either choose not to buy or can’t afford to, “build-to-rent” (BTR) is an option. In a BTR community, developers construct single-family homes or multifamily properties designed for renting rather than selling to individual homeowners. This growing sector caters to a diverse range of tenants, including millennials, baby boomers and families seeking alternatives to traditional multifamily apartments or homeownership. BTR communities often offer shared amenities, consistent quality and professional management, bridging the gap between traditional multifamily investing and the single-family rental model.

Why Renters Prefer Single-Family Homes Over Apartments

Top Reasons Single Family Renters Prefer Single Family Homes

Note: April 2021 survey of 1,160 single-family renters
with a household budget for rent of at least $1,000.
Source: New Home Trends Institute by John Burns Real Estate Consulting LLC

According to data compiled by Hunter Housing Economics, housing starts for BTR communities will total 132,000 this year, increasing to 188,000 by 2027. Despite a slowdown in production this year due to a variety of economic factors, Hunter foresees a recovery in 2024-25 “amid strong growth in demand for single-family rentals and as more builders shift toward” BTR.

The growing preference for renting single-family homes has captured the attention of institutional investors like Invitation Homes, Blackstone and Starwood Capital Group, all of which have amassed portfolios of single-family rentals, another term for BTR. Major homebuilders, including Taylor Morrison, Toll Bros. and Lennar, have ventured into this market as well.

Rental housing expert and RealPage Chief Economist Jay Parsons recently had a conversation with Origin Co-CEO David Scherer about the future of multifamily real estate, including the potential of BTR communities. In a post on LinkedIn, Parsons also discussed the transition of institutional capital from conventional single-family rental models toward BTR investments.

Some additional points to consider that support the BTR model and its advantages over scattered-site single-family rental investing and traditional multifamily apartments:

Economies of scale: BTR communities typically consist of multiple units in close proximity. This allows investors to save on maintenance and management costs and developers to streamline processes, reduce costs and achieve operational efficiencies.

Consistent quality: Unlike scattered-site investing, BTR homes are built with consistent quality and design, making them more attractive to renters.

Amenities and lifestyle: BTR communities often offer amenities such as parks, playgrounds, fitness centers and communal spaces that scattered-site housing does not, making it attractive to individuals or families looking for a community-oriented living experience.

Significant capital flows: Institutional investors, private equity firms and real estate investment trusts (REITs) are investing in BTR communities. Additionally, lenders such as Fannie Mae, Freddie Mac, FHA, life companies and banks often treat debt financing for BTR acquisitions on single land parcels similarly to traditional apartment properties.

The current economic climate has weakened consumer confidence and household formation. Construction costs have risen, regional banks are facing constraints and interest rates remain high—all of which will limit the growth of BTR development in the short run. However, demographic trends, scalability, a housing shortage and changing lifestyle preferences all suggest that this sector is likely to experience strong growth over the long term.