Berkadia’s Cautiously Optimistic Outlook for the BTR Sector

Vice President of Client Services Jeff Coles discusses potential disruptions to this fledgling market.

Jeff Coles, Vice President of Institutional Client Services, Berkadia. Image courtesy of Berkadia

The build-to-rent market has registered record demand in the past few years, prompting large multifamily players to enter the niche and brokerage companies to open specialized divisions for the sector.

Today, the economic volatility is impacting all asset types, including SFRs. Asking rents in the segment dropped by $12 over the last two months of 2022 to $2,083 as of December, as housing demand weakened, according to the latest Yardi Matrix report.

One of the largest brokerage firms, Berkadia, continues to be active in the sector, closing on more than $1 billion in SFR and BFR transactions last year through November. In an interview with Multi-Housing News, Vice President of Institutional Client Services Jeff Coles weighed in on the sector’s strengths and its resilience, and also highlighted some key aspects investors should pay attention to as the economy teeters toward recession.


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How would you describe the BTR market today, considering the current economic headwinds?

Coles: In general, the BTR market has shown a fair amount of resiliency given the current economic headwinds. The rapid rise of mortgage rates to the highest levels seen in two decades has limited the ability of many Americans to purchase homes. Current BTR renters are less likely to transition into home ownership, while the shortage of housing in our country and the need for larger homes continue to fuel demand.

Inflationary pressures, high interest rates, or any disruption in the labor markets could have a potential toll on the BTR market. However, as of now, the fundamentals are still in place, with rental rates on the rise, renters who are staying in place and demand from capital existing.

Overlook at Buffalo Park. Image courtesy of Berkadia

What U.S. markets are currently recording the highest level of activity, for both investment and development?

Coles: The markets with the greatest population growth are recording the highest levels of BTR activity. We continue to witness strong demand in the Sun Belt markets of Phoenix; Dallas-Fort Worth; Austin, Texas; Atlanta; Jacksonville, Fla.; Orlando, Fla.; Charlotte, N.C., and Raleigh, N.C. Developers have nearly 14,000 build-to-rent units under construction, more than double the amount a year ago.

The demand for capital is attracted to strong fundamentals such as employment growth, high average salaries and the escalation of home prices demonstrated in these markets. It is also fair to say that several of these markets demonstrate lower barriers to entry through less restrictive zoning and governmental regulation, which helps.

What drives investors toward these properties nowadays? Why are BTR communities a good way for a company to diversify its portfolio?

Coles: It begins with strong fundamentals. Build-to-rent properties make up about 6 percent of all new homes being built in the U.S., up from 3 percent pre-COVID-19. Demand for this product continues to skyrocket, pushing average rents to an all-time high of $2,020 per month in comparison to conventional rental apartments which average $1,736 per month. BTR rent increases have averaged 4.2 percent since 2016—9.5 percent year-over-year for new leases and renewals in the second quarter of 2022. National average occupancy rates are north of 96 percent.

Investing and building BTR communities is a great hedge against inflation, especially if incomes keep growing—a compelling reason for portfolio diversification. This segment is poised for continued growth as 67 percent of the BTR households are within the 25 to 55 age cohort. These households typically earn high incomes and are renters by choice. They are also a “stickier” rental base, with average turnover much lower than conventional apartments.

When acquiring build-to-rent properties, what should investors pay attention to?

Overlook at Buffalo Park clubhouse. Image courtesy of Berkadia

Coles: From a macro level, three fundamental factors:

Architectural design, site layout and location—The community should have a great overall impact on the neighborhood and renter experience. It should demonstrate a desirable community flow, like cul-de-sacs, open walking areas, functional unit layouts, such as ample living areas, garage parking, fenced backyards, and a desirable school system, which is not a “must” depending on the BTR product type, but it is the top investment question asked by buyers.

Another factor is median incomes. Desirable area median household incomes is a must, both from a resident demographic standpoint as well as submarket median incomes.

The last factor is location fundamentals. Insurance costs and geopolitical issues should be accounted for. For example: Is the property in a low natural disaster area? Are municipal rules and regulations pro-rental and not tax prohibited?


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Please tell us a few details about one of your recent BTR deals. Why did that particular property stand out to the investor?

Coles: The 155-unit Overlook at Buffalo Park in Flagstaff, Ariz., is a cottage-style BTR community comprising one-, two- and three-bedroom cottages averaging 1,009 square feet. Flagstaff is a very housing-constrained city with limited future pipeline due to strict zoning regulations, neighborhood opposition and forest reserves. There are not many options to rent single-family homes or newer traditional apartment communities at an affordable price in a market of older vintage products.

Also, for-sale homes are at an unattainable price point. With limited future supply, Overlook at Buffalo Park will be a great performing asset for years to come as well as providing renters the best option to live in a home at an affordable price compared to vintage apartment buildings.

What will fuel demand for BTR product going forward?

Coles: Among many factors, the U.S. housing shortage with undersupply estimates of two to five million homes will fuel demand. The increasing preference to rent over purchasing will be another driver. Millennials are transient and renters by choice, with one percent becoming homeowners by the age of 31, versus 32 percent for Boomers at the same age. Also, there is a desire and requirement for more space by renters as the hybrid workplace is here to stay.

Overlook at Buffalo Park interior. Image courtesy of Berkadia

With a brewing recession on the horizon, do you believe that the sector will stay resilient? How do you expect it to perform in a downturn?

Coles: In short, resilient with cautious optimism. I expect to see some normalizing as acquisitions will be impacted by higher costs of capital. However, barring any major disruption in the labor markets, acquisitions will continue at a steady pace while more opportunistic capital will take advantage of reduced market competition. Operationally, the solid fundamentals should remain as rental demand is expected to stay healthy due to the demand for BTR, strong occupancies prevail—more than 95 percent—and the lure of lower average operational expenses.

Any predictions for this niche? What should investors expect in 2023 and beyond?  

Coles: My prediction is that over time, the popularity of the BTR market will morph into a class of multifamily generally known as “low-density housing.” It will include SFR, townhomes, horizontal communities and garden communities.

In 2023, for many of the reasons stated regarding the strong fundamentals and resiliency of this asset class, investors should expect increased interest in this space from capital providers, conventional apartment operators and home builders looking to sell portions of their pipeline to reduce risk of oversupply. Barring any major economic disruptions, I see the BTR asset class outperforming most other types of real estate and on par—if not bettering—conventional apartment communities.

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