Optimism for Single-Family Rentals: ULI
Strategies discussed at the organization’s virtual Spring Meeting included a long-term investment approach to reduce exposure to volatility.
Zoning rules in single-family communities are often restrictive and prohibit the development of dense, horizontal multifamily projects. Build-to-rent housing developments can be integrated into single-family communities while still preserving the neighborhood’s design and feel. The sector’s evolution was the focus of the panel, “Meeting Emerging Housing Needs through Low-Density Rental Development,” on the second day of ULI’s Spring Meeting.
What’s driving investors to the build-to-rent market?
Affordability and demographic shifts are the main drivers of this low-density product. Millennials who fit into the renter-by-choice class like the flexibility and mobility that renting offers. They are looking to move away from the high-density product but want to retain the lifestyle that renting supports.
“They want to be able to move tomorrow if they get a new job,” said Ashley Casaday, senior director of investments with RangeWater Real Estate.
Millennials are also drawn to build-to-rent communities because some are ready to start families and need the additional space that urban multifamily doesn’t provide. Baby Boomers, too, are in the market for build-to-rent. They want to downsize but aren’t ready to transition to senior housing communities, and single-family rentals provide an alternative for them.
Which markets support build-to-rent product?
RangeWater suggests looking for markets with strong population and job development, low barriers-to-entry and less expensive land costs. The company doesn’t stray too far from the areas it would look for multifamily development, as they recently closed on 110 build-to-rent townhomes in Atlanta.
Andrew Carmody, managing director at Tricon Residential, said his company targets high-growth Sun Belt markets—the Southeast, Texas and the Southwest—and has had success in these areas. Taking a long-term approach to returns reduces how sensitive investment firms are to volatility.
Tricon owns over 31,000 single-family and multifamily rental homes across North America, including 23,000 SFRs across the Sun Belt. The firm has been operating in the SFR space for 9 years.
Tricon also owns assets in Western California, though Carmody said developing new SFR projects in West Coast markets is challenging with the high cost of land and rents that don’t reach high enough to offset that cost, making it impractical to develop there.
How do you scale in SFR communities and which product types are optimal?
Tricon entered the market one home at a time and found that adding “a pod” of 130 or 150 units to a community is suitable for their local property management groups to oversee. It looks to build up 400 homes or more in a city—either in one community or scattered across a city—leaving room for growth beyond that.
Pacific Coast Capital Partners, which entered the build-to-rent space two years ago, employs the separate community model, targeting 130-150 units in one community, while remaining flexible to build additional product in the same community or to expand to other communities within a submarket.
Sean Flannery, a managing director with the investment management firm, said his company has eight projects under development and another four on the horizon.
Flannery added that Pacific Coast’s management model is to have people on the ground to respond to residents and to be as people-based as possible.
Detached homes and townhouses with three or four bedrooms, a driveway, a garage and a small yard are the most common product type in the build-to-rent market. These are easy to develop in suburban communities, but in more urban areas, townhomes are easier to integrate.
What amenities appeal to renters in this market?
Often, the amenities within these communities are outdoor offerings, such as a pool area, sheltered outdoor space, walking trails and other spaces where people can gather and interact with one another. There is less focus on interior amenities, as residents want that community benefit more than the traditional multifamily amenities.
What are the hurdles to developing build-to-rent projects?
Challenges of developing SFRs include land and materials costs, along with competition with the for-sale market for land and labor. There is often community and municipal pushback against these projects, as well.
“They’re not conventional single-family, and they’re not multifamily. … They fall in this middle spot,” said Carmody.
Homeowners don’t want renters in their community; they dislike the idea of short-term, transient renters and are worried about the neighborhood losing its value because renters don’t take pride in the homes they occupy. These concerns can be managed by educating communities and local municipalities on the reliability of the institutional owner that’s managing the product, and the owner’s desire to maintain the feel of the community, including appearance and upkeep.
“The expectation is these tenants are staying for longer and are really focused on the community and what their (SFR) looks like,” said Flannery.