Build-To-Rent Developers See Opportunity In Growing Renter Class
Owning a detached, single-family house doesn't quite have the appeal it once did. Still, millions of Americans want to live in detached residences, even if they don't want to own them, and developers are stepping up to offer build-to-rent communities.
No single factor is driving demand for single-family rental housing, experts say. Partly, the large millennial demographic is looking for larger places to live but not always to buy, either because they can't afford it or don't want to be tied down. The coronavirus pandemic has also spurred new interest in single-family houses and the distance they provide.
Currently, about 6% of new single-family homes are developed specifically to be rented, according to RCLCO Real Estate Advisors Managing Director Todd LaRue. At that rate of development, about 700,000 new single-family housing units for rent will be developed over the next 10 years.
"That isn't going to be enough, considering the projected growth in demand for single-family rental units," LaRue said. "That means that there will be a strong opportunity for developers of this kind of product in the coming decade."
The United States is more a nation of renters than it used to be. Beginning with the Great Recession, the number of Americans owning their own homes has decreased. As of the third quarter of 2020, the Census Bureau reports, 67.4% of U.S. households owned, an uptick from the mid-2010s, but still well below the mid-2000s, when the rate nearly touched 70%.
Single-family rentals represent roughly 35% of all U.S. rented housing units, according to a 2018 study published by the National Bureau of Economic Research. That totals more than 12 million single-family rentals. Most of these rentals are still in the hands of small owners, many of whom rent out a single house, but corporate ownership of single-family housing has grown since the post-2008 housing crisis.
A study published by Curbed in 2018 found that about 200,000 single-family homes are owned by corporate investors such as Invitation Homes, American Homes 4 Rent, Progress Residential, Main Street Renewal and Tricon American Homes. They took the opportunity to buy properties that were foreclosed on in the early 2010s, the result of the dire economic straits so many people found themselves in.
As the economy improved — until the pandemic hit — these corporate buyers were less able to find houses to buy. But the idea of renting a detached house, even from a corporate entity, had become more established, especially among millennials.
"That generation is now advancing to a later life stage, where the family formation is taking hold, or just advancing beyond the age at which they want to live in standard apartments," LaRue said.
At the same time, the economics of homeownership are often against them, faced with incomes and debt loads that don't allow them to accumulate the necessary cash for down payments to enter the for-sale housing market in many places, LaRue said. Especially not detached, for-sale properties with yards.
But that isn't the entire picture for single-family renters. Many renters at Christopher Todd Communities are perfectly able to buy a house, Christopher Todd Properties CEO Todd Wood said, but they prefer not to, at least for now. At the same time, they want to live in one.
"They saw what happened back in 2007, and they don't want to be tied down to a 30-year mortgage," Wood said. "They want to be mobile in their work environment, be able to get up and move. So from a millennial standpoint, a rental house that gives them space and amenities is an attractive solution. Besides, renting doesn't have a negative stigma anymore."
Then there is the matter of distance from one's neighbors. Traditionally, that meant avoiding noise and other distractions. Currently, that means avoiding disease as well. The pandemic might end next year, but the appreciation of distance might not.
"We're in a situation now where people are looking for less density," NorthMarq President of Investment Sales Trevor Koskovich said. "They don't want to use any kind of common areas, but they do want direct access from their parking spot to the front door without having to touch anything or see anyone. There's an insatiable appetite in the market for that kind of space, and for-rent houses will help supply it."
For-rent housing development includes what might be called "horizontal apartments," LaRue said. That means the unit sizes are very similar in size to traditional apartments, but they are slightly detached from one another or in the form of townhouses or duplexes. That kind of development has been around for many years.
The up-and-coming developments are essentially communities of traditional, single-family detached houses, only built for rent rather than for sale. They often tend toward the luxury end of the spectrum, LaRue said, but not always, and typically compete with apartments by offering amenities.
"The question now is how much builders are willing to pivot to away from for-sale towards the rental product," LaRue said.
Early indications are that some developers are willing to jump into the game.
Phoenix-based Christopher Todd Properties develops for-rent, single-family housing communities in its home market, and then sells the communities in toto to investors. This year alone, the company has sold five Christopher Todd Communities in the greater Phoenix market totaling 943 houses.
“Investor appetite for built to rent has ballooned recently," Koskovich said. "Not only are we seeing demand from institutional investors, there is also interest from lenders to finance these kinds of deals."
Recently, Koskovich brokered the sale of Christopher Todd Communities At Stadium, a 313-unit community of single-family houses in Phoenix. The property includes one- and two-bedroom detached houses with private backyards.
Measuring a bit more than 1K SF, the two-bedroom houses rent for about $1,900. At that price point, they rent for more than most other multifamily properties in that part of greater Phoenix, though those tend to be smaller one-bedroom units.
Single-family houses listed for rent in the neighborhood on Zillow tend to be a little larger — but in the same ballpark — as the Christopher Todd houses, though without many of the apartment-property style amenities, such as gated entry, a fitness center and a swimming pool.
"We're fortunate in that when we compare ourselves to a classic multifamily properties, we're usually able to get about 25% to 30% higher rent rates," Wood said. "Also, our retention rates are almost 50% higher than traditional apartments."
"Investors are seeing this type of asset as one that they can buy and hold, benefiting from their lower turnover and some operational efficiencies," Koskovich said. "So there's been demand for the properties, and I think that's going to continue to grow in many markets going forward."
Another major player in the single-family rental space is also a Phoenix operation, NexMetro Communities, which has developed 11 for-rent projects under the Avillia brand in its home market, along with properties in Tucson, Denver and Dallas-Fort Worth. This year, the company entered the Florida market for the first time, breaking ground on 152 houses on 13 acres in Odessa, which is in exurban Tampa.
"More consumers, including a growing number of baby boomers who have owned homes for many years, are choosing to rent rather than own a home," NexMetro CEO Josh Hartmann said. "Demand for low-density rental housing is outpacing supply. Even as mortgage rates plunge, the demand for single-family rental home neighborhoods remains strong."
NexMetro has long identified central Florida as a good location for its Avilla brand, Hartmann said, citing a strong local economy, including high rates of household formation, but also the availability of land.
In June, El Paso, Texas-based Hunt Cos. formed a new division, Avanta Residential, to develop single-family rental communities. The company will work with investors, homebuilders and land developers to deliver single-family rental homes toward the more affordable end of the spectrum, though it hasn't set rental rates yet.
"We're seeing a real shift in the mindset about home rental and ownership," Avanta Residential President Jim Dobbie said. “Particularly millennials seem to want the flexibility of renting, but with the privacy that typically comes with homeownership.”
Not everywhere is primed for for-rent single-family housing development, Koskovich said.
"We're not seeing too much of these kinds of developments in California, for example, with its impact fees and regulations," he said. "Build for rent is going to happen in places where for-sale housing development is strong as well, such as Arizona and Texas. Places with strong local economies, developer-friendly governments and available land."
There has been sporadic pushback against rental developments as well, Koskovich said, though it isn't pronounced in the markets where they would do well anyway.
"As the president of the MultiCultural Real Estate Alliance for Urban Change that promotes homeownership, we disapprove of the programs that encourage households to spend $2K to $3K or more a month to rent," Los Angeles-based real estate broker Carmen Hill said.
"We encourage households to take the steps to overcome their obstacles," Hill said. "Those include working with a credit counselor if they have bad credit or take advantage of education programs at the local community colleges if a better job is needed to qualify."