Creating BTR Communities for the Workforce
Despite surging costs, some developers are focusing their strategy on the missing middle.
Today’s economic realities make it especially challenging for built-to-rent home developers looking to build a no-frills product for the cost-conscious renter. We’re talking about communities that appeal to moderate-income renters but don’t qualify for Low-Income Housing Tax Credits or other incentives. The market exists, but so do the challenges.
The BTR and SFR markets are still going strong. A recent study from the National Association of Home Builders shows that, in the past four years alone, single-family rentals have doubled their share of new housing starts—from representing 4 percent of new starts in 2020 to 8 percent this year.
Jacque Petroulakis, chief communications officer for NexMetro, pointed to the growth of the SFR market as a sign of things to come in neighborhoods that have strong demand drivers such as solid job and household income growth and high occupancy rates.
Multi-Housing News found some developers who are crunching the numbers to make the SFR concept work for a broader swath of the renter community. Here are some of their cost-saving strategies.
Geographic diversity spreads costs
With properties across four states, NexMetro’s Avilla Homes flag lets the company distribute risk across multiple growth markets. This keeps rental costs manageable across the whole portfolio. But Petroulakis acknowledged that risk is always a factor.
READ ALSO: Top 10 Challenges for BTR Operators
“Finding those locations isn’t accidental,” she said. “It’s the product of conducting considerable demographic and demand analysis to determine the best metro areas and submarkets in which to build. We are disciplined in our underwriting and use long-term average, not current trends. Using those metrics, we know over the long haul that our properties will be successful.”
Taking advantage of economies of scale
According to the NAHB, the cost of construction materials has increased by 12 percent since 2016, and while increases have leveled off since 2023, they show no signs of dropping. Fortunately, developers and builders have found ways to leverage the economies of scale required to build SFR communities in a way that mitigates and manages costs.
READ ALSO: SFR Snapshot: Potential in a Turbulent Market
John Daher, vice president of development and construction at American Realty Advisors, stressed the value of maximizing site utilization through design and standardization of floor plans and finishes to reduce material costs, allow for more efficient production, lower carry costs, reduce delivery times and simplify the construction process.
He also noted the value of effective use of prefabricated elements. “Using prefabrication of key elements such as roof trusses, flooring systems and wall panels can significantly reduce total project time while still producing quality houses,” according to Daher.
His colleague, Patrick Lataitis, senior director of investment at ARA, noted that the cost of materials goes hand in hand with how they are ordered and used by subcontractors.
“Material and other costs can be managed thorough careful construction monitoring throughout development, value engineering, as well as potentially early buy-out of certain critical materials,” Lataitis said. “Also, financing costs can be managed via a competitive lender bidding process that should result in the best loan economics.”
Labor relations matter
Another major driver for construction costs is labor availability. As the demand for skilled construction labor increases, contractors and subcontractors are spread thin. But developing relationships with subcontractors across the entire process can improve the bottom line.
“In our experience, roughly 80 percent of new construction costs are attributable to subcontractors,” Lataitis said. “Involving key subcontractors—along with the general contractor—in the design and preconstruction process for value engineering suggestions and constructability review can usually save costs, cause less requests for information and time delays for unanswered design questions.”
Strong relationships for building SFR homes don’t just streamline construction costs and lower overhead costs such as management, maintenance and upkeep, they also create opportunities for future projects, noted Jordan Kavana, CEO of ARK Homes.
Niche with a future
The demand for moderately-priced rental houses is likely to have a long runway for developers, considering renting a starter home is now more affordable than buying across the country’s 50 largest metro areas, a recent Realtor.com report shows. On average, owning came with a 61 percent premium as of July.
“With renting you know your monthly payment,” Kavana said. “You only have to come up with a security deposit, and home maintenance is included, and you are most likely moving into a new home with added space and a yard.”
But, according to Petroulakis, the convenience and amenities of SFR are as appealing as the price. “This is a lifestyle choice, not a trend,” she said. “People will continue to want freedom, privacy, and flexibility in the future more than ever before.”
