Build-to-Rent Single Family: Early Takeaways from the First Movers

Build-to-rent single family (or “BTR” as we’ll refer to it here) probably features the widest gap between “talked about” and “invested in” among real estate property types over the last few years.

This new institutional property type’s potential position as either competitor or complement to single-family home ownership, one of the bedrocks of the U.S. economy and culture, has generated ample conversation. It also appears inevitable, as the demographic and economic drivers for more affordable, lower density housing are as clear as such trends get, and supply is, and is likely to remain, tight.

But for all the talk about BTR, and though it goes against the conventional wisdom to note it, we’ve seen relatively little actual investment activity in it. For example, though starts of purpose-built single-family homes were up 32.7% year-over-year in 2022, the 69,000 homes started is equivalent to 13.0% the of multifamily units started and just 0.4% of the existing inventory of single-family rentals in the U.S. With apparently solid fundamentals and relatively little investor activity, we therefore perceive plenty of room for growth and opportunity for investment.

BTR investment activity will likely remain relatively muted, however, until it generates a lengthier track record. We don’t yet have much data to help us underwrite market acceptance and how that translates into rents, positioning, lease-up pacing and occupancy, necessary features and amenities, product design, or even how investors will value BTR income.

Between RCLCO’s Real Estate Economics practice, which has conducted several strategy assignments and hundreds of market studies for BTR operators and investors, and RCLCO Fund Advisors (RFA), which has advised institutional investors to commit $1.1 billion in equity to BTR developments, we have a front row seat to this emerging property type. We’re therefore starting to learn from early deliveries and have collaborated to compile the following early observations from both stabilized BTR and communities in lease up:

Early movers confess to having made numerous mistakes in product design, features, amenities, and in managing lease-up, but are benefiting from a lack of competition for a desirable product. First-generation products aren’t perfect, but are generally achieving higher than underwritten rents and exceptionally high occupancy.

Experienced multifamily leasing agents that have shifted to BTR report that it’s the easiest product they’ve ever had to lease: though some education is sometimes necessary (prospects sometimes show up expecting to tour an apartment building or buy a home, but are pleasantly surprised to find a low density rental product), market acceptance is high and BTR typically beats out either multifamily or scattered site rental comparables if prospects can afford it.

BTR communities are serving several renter segments—Millennials with expanding households, midlife professionals tired of apartment living, retiring singles and couples looking to be closer to their kids, newly-arrived families checking out the area—but rent segmentation among communities currently seems illogical given material differences in quality and location. We expect this will rationalize in the future, but we perceive three reasons for the situation:

• BTR renters seem to be relatively value-conscious, particularly in exurban settings: at this point, leasing agents and investors report chunk rent “ceilings” that are hard to break given prospect resistance to pay “so much, this far out.”
• Investors don’t yet know the “right” lease-up pace for BTR, and some early movers have emphasized occupancy relative to rents in order to facilitate quick exits.
• Communities are frequently leasing homes amid ongoing construction and before delivery of amenities; some type of discount may be necessary to lure renters to an unfinished community.

In general, though, BTR rents seem to top out at around the cost of owning a comparable new home in the surrounding area, assuming a 20% down payment. At lower down payment levels, BTR is almost universally positioned to be cheaper than owning.

Renewals on the first wave of lease expirations seem to be high, as much as 70%, confirming our early hypothesis that BTR turnover would be more like scattered-site SFR than market-rate multifamily.

Many products don’t seem to be built for the inevitable wear-and-tear that comes from renters. Common areas where we’ve seen under- or misplaced investment include: cheaper kitchen cabinets and drawers, lightweight doors, carpeting (which should probably be entirely avoided), handing off backyard maintenance to tenants, etc.

At least in some Sunbelt markets, leasing agents report the market’s desire for homes with the primary bedroom on the first floor (whether in a multi-story home or including some single-story homes), aligning with early observations that while most demand may come from aging Millennials, move-down Baby Boomers are also an important source of demand.

Within horizontal apartments or cottage homes, parking is the most debated topic for developers: How many spaces need to be covered? Do spaces need to be assigned? How close to the unit should the space be located? Does the garage need to be attached? What will the tenant pay for? What we’re seeing in early communities suggests that the debate will continue: tenants generally want covered, assigned parking spaces that are close to their units, but push back on paying $100 to $150 per month to reserve a garage. The answer for BTR communities in planning may therefore be, “it depends.”

Our house view is that institutional ownership and development of low-density rental product is here to stay, and that we should learn as much about it as possible. We expect accumulating data and lessons learned to help improve BTR design and construction, operations, the tenant experience, and investor underwriting. In the meantime, we expect the current favorable imbalance between demand and supply to help counterbalance early mistakes. We’ll be sure to continue to update this list as we learn more, and encourage the real estate community to reach out to us with questions and observations in order to advance the conversation.

Sources

https://eyeonhousing.org/2023/02/single-family-built-for-rent-growth-strong-in-2022/
https://fred.stlouisfed.org/series/HOUST2F
https://fred.stlouisfed.org/series/HOUST5F
https://commercialobserver.com/2022/03/single-family-rentals-strong-future-demand-drivers-to-propel-sector-outperformance/

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