BTR Investors Pay More Than Home Buyers

Columnist Lew Sichelman breaks down Northmarq's latest report on the sector's challenges.

Lew Sichelman

Investors in build-to-rent single family properties, either when fully built or while under construction, are paying more per house than the typical home buyer, according to new research.

Whereas the median price of single-family houses hit $368,200 in the first quarter, according to the National Association of Realtors, investors purchasing entire communities in bulk are paying a median price of more than $434,000 per house, the study found. The difference is more $65,000.

Just two years ago, the median price paid by investors buying entire neighborhoods of houses was about $250,000 per unit, the study by Northmarq found. But by the end of last year’s fourth quarter, the median had heaved to $360,000, with about a third of the sales topping $400,000.

And the surge has continued into this year. “The median price in sales that have closed to this point is $434,300 per unit,” according to the report, which was released in mid-July.

The 24-page report also found that investment activity in BTR properties has fallen somewhat this year from its peak in 2021’s fourth quarter. The number of properties which changed hands in Q4 approached the total sold in all of 2020, to the tune of some $2.3 billion, it said. That’s more than double the 2020 total.

Cost of Capital

Part of the slowdown is seasonal and part is because demand was pulled forward into last year, the report said. But higher interest rates also are having an impact. “The rise in interest rates have likely caused some investors looking to acquire properties to pause as they re-evaluate the higher borrowing costs in a still-low cap rate environment,” said the report.

Nevertheless, more debt and equity capital is reported to be finding its way to the single-family BTR sector. “Strategies and deal structures continue to become more varied and complex as the market takes shape,” it says. “What was once a niche product has become increasingly familiar (to) lenders, who are seeking to add these loans to their portfolios. Lending terms for new SF BTR acquisition loans generally track terms for acquisitions of new, Class A apartment communities.”

In some cases, the report adds, a new loan structure has emerged that allows investors to take down a cluster of houses at the point when they are ready to obtain occupancy certification. There is an increasing appetite for this type of financing, according to the report.

On the debt side, it adds, an expanding number of lenders have separate buckets of capital designated specifically for BTR developments. And as for equity financing, several large institutions are allocating equity capital to BTR projects. But the competition for suitable and available building sites is stiffening.

When investment activity surged late last year, cap rates compressed. During the first half of 2021, cap rates ranged between 4 percent and 4.5 percent. Now, “the bulk of transactions” are in the 3-3.5 percent range.

While development activity gained momentum at the national level, “builders are showing a clear preference for certain regions in the country, while holding off on construction in more mature but lower-growth economies,” according to the report.

Location, Location, Location

With better, more targeted financing, investors also have been able to penetrate into more markets, especially across the Sun Belt state. Arizona remains the primary focus, but more and more deals are taking place in Texas, North Carolina, South Carolina, Georgia, Nevada and Florida. The report takes an in-depth look at Nashville and Florida.

Since the beginning of 2019, the South has accounted for 46 percent of the delivered single-family BTR houses nationally. According to Census Bureau figures, 63 percent of the BTR houses started last year were in the South. Of the rest, 21 percent were in the West, 12 percent in the Midwest and 4 percent in the Northeast.

Starts are forecasted to hit 100,000 by 2025. For this year, though, the study predicts they will reach 70,000, or about 10,00 more units than were started last year.

Completions also are accelerating, but at a more modest pace. About 60,000 rental houses will be finished this year, up from about 53,000 in 2021. Last year’s fourth quarter deliveries reached their highest point since mid-2019 and accounted for more than 30 percent of the total for the year.

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