The rise of remote work culture and the desire for more space fueled the need for single-family built-to-rent homes, especially among the maturing Millennial cohort. Residents of single-family built-to-rent houses can enjoy the amenities of a mortgaged home but without the financial commitment.
Lenders, developers and investors have taken notice of this booming niche sector and there is plenty of capital to support the growth of this product type. Multi-Housing News spoke to Caperton Putt, managing director & head of originations at Trez Capital’s Atlanta office, about his projections for build-to-rent and about the challenges of financing these projects.
What can you tell us about investors’ current interest in build-to-rent single-family homes?
Putt: It feels insatiable at the moment. This product offers people opportunities to have a class of housing that didn’t really exist before. It used to be either an apartment or flat condo, but now there’s another option that is highly sought after, especially for people who want to downsize and still enjoy the single-family home lifestyle or have dual residency. Other perks of build-to-rent include amenity access and professional management. Overall, the capital to support the demand is abundant.
Tell us about the main challenges when it comes to financing build-to-rent products.
Putt: One of the biggest challenges is that the value of the cash flow is many times is greater than the assets on the ground. Investors will pay a cap rate for that cash flow, but the overall value might be more than what the individual for-sale homes in the next subdivision are valued at.
For example, a build-to-rent house might be valued by investors at $425,000, but the same house one street over that is not part of the build-to-rent pool might be worth $375,000. That can present an underwriting challenge.
We have lenders on the ground in those markets and have been able to get behind the comparisons and the demand to overcome what appears to be a challenge.
The other important piece of this is the abundance of land needed for a build-to-rent development. In certain markets, from Texas to Virginia, there is an abundance of affordable land coupled with the demographics to support the demand.
What are some of the hot markets for this type of project? Why?
Putt: We’ve seen double-digit rent growth in many Sun Belt markets, following years of steady gains. Some of that is related to pent-up demand driven by COVID-19. You have Californians moving to Texas, Denver and Arizona, and Northeast high-density market residents coming down to the Sun Belt. That includes Raleigh, N.C., South Florida, Greenville, S.C., Huntsville, Ala., and Atlanta, among others. What used to feel like tertiary markets don’t anymore because of the job growth and population increases.
How do you expect the anticipated higher interest rate environment to impact multifamily financing?
Putt: We do expect three, possibly four, rate hikes from the Fed this year. That will raise the cost of borrowing across the board. However, when I look at cap rates, I don’t see a correlated increase. There’s so much money still waiting to invest in multifamily that values still might hold up in a higher rate environment. The good projects will still be able to be digested and earn adequate return for the investors.
What will be the central theme of multifamily lending in 2022?
Putt: Good times will continue to roll. I don’t think there is going to be a slowdown in the multifamily and build-to-rent spaces, even with higher interest rates and the other challenges I mentioned. We’ve had a chronic shortage of housing and we’re not going to fix that by building single-family houses to buy. You just can’t right now. At Trez Capital, we’re doing our part to finance as much as we can. Being a creative lender allows us to look at different markets and understand the needs of borrowers in a different way.