Homebuilders Chase SFR Market
- Mar 04, 2021
Investors and residents are gobbling up single-family rentals, so developers–both traditional homebuilders and multifamily specialists–are clamoring to feed their growing appetites. According to the National Association of Home Builders, there were approximately 14,000 single-family built-for-rent starts in the third quarter of 2020, a 27 percent increase over the prior quarter.
Rent growth and occupancy are strong for this alternative asset class. Besides a robust demand for single-family homes that has been stoked by the pandemic, large builders as well as smaller, regional firms like the versatility that the SFR market offers.
“They can develop to hold and rent—and get high returns that way,” said Brad Hunter, a housing industry consultant in West Palm Beach, Fla. “Or they can build houses and sell them to an operator. If they’re a developer, they can develop and sell lots. Or they can joint venture, staying in on the deal on the rental side. There are a lot of different strategies.”
The shift from for-sale to for-rent
Fort Washington, Pa.-based Toll Brothers Inc. is well known as a builder of single-family luxury homes and is also active in multifamily.
“We see the single-family rental business as a market with tremendous growth potential,” said Frederick N. Cooper, Toll’s senior vice president of finance, international development and investor relations. “We felt that there was a niche for us to distinguish ourselves with a high-quality product that would appeal to a variety of customers.”
Toll is targeting renters by choice who want a highly amenitized community and good school system but don’t want to own, as well as those relocating who want to “test drive” an area before buying.
The firm’s first community is Las Casas at Windrose, consisting of 133 detached three- and four-bedroom homes in Litchfield Park, a suburb of Phoenix. With a pool, clubhouse and other features found in a for-sale community, rents at Las Casas start from $1,900 to $2,200 per month.
Multifamily developers are also joining the fray as a diversification play.
“We looked at a few other opportunities, including senior living and student housing, but single-family rentals seem to have the most opportunity,” said Callum Parrott, president of single-family rentals at Mill Creek Residential, a multifamily developer, investor and operator of apartment communities nationwide.
Parrott said the firm is expanding into a space that has typically been managed by mom-and-pop operators. “Mill Creek is vertically integrated, with construction, development and operation capabilities, and we think the product type, while not easy, will be easier than what we have built in the past.” Plus, the initial markets Mill Creek is targeting—the Carolinas, Georgia, Florida, Texas and Arizona—are all markets in which the company is currently operating.
Capital abounds for SFRs
Capital is “chasing after this space,” according to Hunter. “At least $7 billion got invested or earmarked for build-to-rent last year, and it’s probably going to be at least $10 billion this year.”
The SFR industry is currently very fragmented and, hence, attractive to REITs and institutions looking to consolidate.
In January 2021, Pretium and a group of its investors, as well as funds managed by the Real Estate Equity and Alternative Credit strategies of Ares Management Corp., acquired Front Yard Residential Corp., a SFR provider. The transaction made Pretium the second-largest owner-operator of SFR properties in the U.S., and the deal represented the first single-family rental take-private transaction.
The SFR space is so attractive to institutional investors that JLL Capital Markets created a new team to specialize in this alternative asset class.
“A lot of investors view SFR as a diversification of their current residential portfolios,” said Matthew Putterman, a senior director at JLL Capital Markets who is a member of the new SFR team. “They are also attracted by the long-term tailwinds of changing demographics, with aging Millennials and Boomers potentially downsizing or wanting to sell and have flexibility. Pile on top of that the expanded preference for renting nationally.”
Exit strategies differ
The availability of investor capital and the keen interest of institutions is giving builders a variety of exit options.
Lured by SFRs’ strong rent growth and high occupancy rates, some plan to build and hold, while others, like Alpharetta, Ga., developer Jim Jacobi, plan to build, stabilize and sell future SFR communities. Jacobi’s Parkland Springs community in Lawrenceville, Ga., consisting of 58 stacked townhouses for rent at $1,900 to $2,200 per month, is a long-term hold.
“My comfort level is owning smaller projects,” said Jacobi, president of Parkland Residential. “I like the idea of having 10 or 12 communities that I want to keep in my long-term portfolio and then the rest of projects, we’ll build them out, stabilize and sell them off.”
Toll Brothers is also building high-quality communities with the intent to hold them. Since Cooper expects his tenants to have incomes in the $100,000-plus range and rent for a few years before eventually buying a larger move-up home. They also represent potential new buyers for the company’s for-sale luxury homes.
Other developers build SFRs with the intention of selling the project as a whole to an investor, whether that sale takes place as a forward takeout during construction or after the community is stabilized. Mill Creek’s Parrott, for example, said his exit strategy depends on who the firm’s investors are.
“We build to hold, but we will consider opportunistically selling if it makes sense,” Parrott said. “We’d like to build up our portfolio and see where it takes us in the future.”
Ting Qiao, CEO of Wan Bridge, a vertically-integrated developer, builder and operator of SFR communities across Texas, said his business model is unique. “Even though we sell properties to investors, we will still be the operator because we have an in-house property management team,” he said.
The majority of Wan Bridge’s communities are “under an investment contract before completion of construction,” Qiao noted. One recent project is Bay Colony Pointe West, a 175-home SFR community completed in September 2020 in League City, Texas. It’s at full occupancy, with rents of $1,800 to $2,000.
Jacobi of Parkland Residential said he’s putting “most but not all,” of his eggs in the SFR basket. “‘Rent’ is no longer a four-letter word. There is such a large demand for rental housing, and I see that demand growing substantially in the future. Build-to-rent was a very good and strategic move for our business.”