Lending in the Build-to-Rent Single-Family Market: Q&A
- Dec 09, 2020
The single-family rental market was already growing in popularity prior to the pandemic. The maturing Millennial cohort’s changing preferences, coupled with a shortfall in supply, has been driving demand for the product type and prompting operators to explore new opportunities, including build-to-rent single-family rentals.
According to Arbor’s third-quarter report on SFR investment trends, demand for the sector has reached generational highs, and occupancy rates across all single-family rentals averaged 95.3 percent.
Multi-Housing News spoke to John Hutchinson, president for the central & southwestern regions at Trez Capital. The lender started financing SFR projects three years ago and has been expanding ever since. Hutchinson shared his insights on the SFR lending environment as well as prospects for the growing sector heading into 2021.
How did Trez Capital start funding single-family rental deals?
Hutchinson: Trez started funding SFR deals in 2017 with NexMetro Communities, a pioneer builder of horizontal multifamily communities. We were one of the first lenders to recognize the opportunity and Trez Capital financed one of NexMetro’s first projects in Phoenix. In the fourth quarter of 2017, we forged a multi-project deal with committed capital in excess of $100 million. The lending relationship initially included five of NexMetro’s Avilla Homes communities slated for 2018 in the Phoenix, Dallas and Denver markets, but it has since grown to 12 projects expanding to markets including Tampa, Fla. We are continuing to do more projects with them.
While we weren’t the first to finance these types of deals, we were the first to do it on any scale and now Trez is one of the leaders in the U.S. when it comes to financing this product type. We believe the concept will continue to escalate in demand and popularity.
What are the primary aspects lenders should consider when providing financing for an SFR project?
Hutchinson: When we consider financing these types of products, we look to the experience of the developer, the projected net operating income from the development, the estimated rental rates for the project and the rental rates of the anticipated competition. We also look at current and projected cap rates and the inventory of rental property—both apartment projects and SFR product—in the competitive area. The quality of the school district is also important as many of the tenants will have school-age children.
Since SFR developers can’t rely on sales or presales, what are some of the best ways they can demonstrate demand to potential lenders?
Hutchinson: A well-researched market study of the competitive area to support the need for the project is essential. Separately, data on population growth and job growth in the city in which the project will be located is also important.
Can you explain the current dynamics of this market sector?
Hutchinson: There are two basic types of build-to-rent products prevalent in the market today. First, there are single-family homes built on platted lots. Typically, these homes are being built where the developer has control of enough lots to create an entire neighborhood of rental homes. This allows the owner to operate with cost efficiency in managing the rental and maintenance of the homes. The homes are between 1,300 to 2,000 square feet in size, have a two-car garage and a back yard. The homes will generally have three bedrooms and two bathrooms and are built on lots that are 50 feet wide or less.
The second type of build-for-rent homes are not built on platted lots but are platted as an apartment project would be platted. This type of project is usually built on commercial land that is rezoned to allow for this type of product. The homes are between 650 to 1,300 square feet in size and have interior amenities similar to luxury apartments. The homes offered in these communities are one, two or three bedrooms in size.
A unique aspect of this product vs. the typical apartment project is that all of the homes are single-story, and the two- and three-bedroom homes are detached from the other homes. The one-bedroom homes are duplexes. All of the homes will have a backyard and many will have access to a garage. Like many apartment projects, these projects will be gated and offer some amenities such as a swimming pool and hot tub for the residents. These projects are often referred to as “horizontal multifamily.” This type of product originated in Tucson, Ariz., but has been actively built in Phoenix.
How did the SFR lending environment perform prior to the pandemic and how has the sector performed since?
Hutchinson: The SFR product performed very well prior to the pandemic and has continued to perform well. The tenant profile for this type of product is generally higher income than a garden apartment, and the rent collection during the pandemic has been very close to what it was prior to the pandemic.
What makes the SFR market appealing to real estate investors?
Hutchinson: In the high growth cities Trez focuses on, the SFR product is very appealing for several reasons. First, many people are moving to these cities and may want to rent before committing to purchase a home. Second, the projects are less dense than the typical apartment project, which is very appealing during the pandemic. This is true for both the SFR built on platted lots and the horizontal multifamily type of product. Third, many developer-investors feel that their exit is to sell to one of the institutional owners of this product, such as Invitation Homes.
What are the most popular regions for this type of product?
Hutchinson: The hotbed for the horizontal multifamily product has been Phoenix, although it is becoming very popular in other cities as well. Product built on platted lots is popular in most high-growth cities where an investor can purchase lots and build a home that can be rented at a rate comparable to the mortgage payment for a first-time homebuyer.
Can you tell us what’s driving demand for new build-to-rent product?
Hutchinson: One of the reasons this product is popular with tenants is that today many people have very mobile lifestyles and do not want to be tied down with a mortgage, but they still want the space of a house and luxury community amenities without spending time on home repairs or maintenance.
What does the 2021 outlook look like for the SFR lending market?
Hutchinson: Subject to the future impact of the pandemic, the outlook for 2021 is very strong. Trez has a great demand for financing both the horizontal multifamily type of product and the product built on platted lots. Many of the large master-planned communities are opening up sections of their projects for the SFR product. I think you will see more of this as it creates a new segment for use of their land.