Trends in Single-Family BTR Communities
Is the sector benefiting from prohibitive housing costs or offering would-be buyers an alternative?
Hamlet Watkins. Image courtesy of Middleburg Communities
In a year rife with challenges to all asset classes, single-family build-to-rent communities have been a case study in adaptability.
Boosted by increasing demand, suburban BTR projects appeal to a diverse array of renters. Due to their relative affordability for the amount of space they offer, the communities have become a darling of the multifamily world. Investment in the sector has also attracted attention as a signifier that would-be homeowners will choose to rent for the time being.
Addressing the demand
The $4.4 trillion sector’s fundamentals reveal stability as real estate faces a gloomy economic horizon. Data from an April 2023 report from Yardi Matrix and a mid-year 2023 report from Berkadia show growth in both rents and new construction. Average rents have increased by $6 to $2,089 through April of this year, while deliveries in communities of 50 or more homes reached a high of 14,581 units in 2022, according to Yardi Matrix, with this year’s numbers on track to match or surpass that. Similarly, starts totaled some 17,000 at the end of 2022, up 6 percent over the previous year, according to the Berkadia report. Occupancy rates remain at a cool 95.5 percent.
An interior of a home in Hamlet Watkins Centre, a development taking place in Richmond, Va. Image courtesy of Middleburg Communities
The types of individuals most interested in these offerings are diverse, ranging from Millennial couples to transitional households and even retirees looking to downsize their living space, Todd LaRue, managing director of RCLCO Real Estate Consulting, explained. What these groups share is the desire to “have the benefit of living in a single-family home without the mortgage or maintenance responsibilities that come with homeownership,” said LaRue, noting that this scenario “is appealing to many.”
Among physical characteristics, residents most like the green spaces and private garages, amenities that have grown in popularity as more people have continued to work from home. Mark Alfieri, CEO of MORE Residential, sees such offerings as providing the attributes of a traditional single-family home with the added value and reduced stress of traditional multifamily property management services. “Unlike an apartment, you don’t have anybody living above or below you; you have much more privacy” in addition to a garage and backyard. “It’s what people are looking for, and it appeals to a wide variety.”
Additionally, specific aspects of the communities themselves have proven to be highly adaptable to trends within a given metro, among them renter preferences and economic fundamentals. According to Timothy Savage, a clinical assistant professor at the NYU Schack Institute of Real Estate, in comparison to other property types, where adjustments to asking rent or development changes are a much more drawn-out process, single-family rentals “have the ability to adapt a property much more rapidly, tailoring to local markets.”
To Andrew Barbakoff, vice president at PCCP, the physical characteristics such as the green space and privacy of homes, as well as the adaptability of the developments in comparison to both traditional multifamily and homeownership, offer the “best of both worlds.” Renters can “have the flexibility and maintenance-free living provided in an institutionally owned/managed community that provides the pride of living in your own home, but in a live, work and play area otherwise unaffordable given high interest rates and tailwinds in the for-sale retail market,” he said.
Hamlet Maybank, an ongoing development from Middleburg Communities taking place in Charleston, S.C. At full build-out, the community will include 211 units, and will be situated in one of the metro’s fastest-growing submarkets. Image courtesy of Middleburg Communities
These benefits are impacting developers’ strategies. Take Middleburg Communities. “People want to be close to employment nodes, they want to be near good school districts, they want access to essential services and they want to be in higher-growth areas,” Christopher Finlay, the firm’s CEO, told Multi-Housing News. “We target those markets, and we have seen that this is where the success has largely risen.”
PCCP makes a direct connection between the two in its developments, following an analysis of fundamentals of traditional multifamily considerations, coupled with those of single-family feasibility. “We generally underwrite a rent-vs.-own analysis for all of our communities to get a better sense of how our rents compare to the expected payments in homeownership,” said Barbakoff.
Sources of the new BTR demand
The sources of such demand mirror historic and ongoing migration patterns, driven by employment opportunities and overall lower costs of living. Mirroring nationwide migration patterns, demand for single-family rentals has sprouted primarily in the Sun Belt, with states such as Arizona, Florida, Texas, Georgia and South Carolina attracting tens of thousands of new residents, alongside a great deal of single-family rental investment and development focus. According to data from a March 2023 report from the U.S. Census Bureau, the top 10 fastest-growing counties are all in the Sun Belt, attracting on the order of 358,861 new residents.
Covey Homes Dawson Ridge. Built outside of Atlanta, the community offers access to many employment nodes, retail centers and educational institutions. Image courtesy of MORE Residential
Many high-level developers and investors, including those not historically involved in the sector, have taken notice. Institutional investors, banks, boutique developers and even service companies have allocated considerable capital and personnel to the region. In February of this year, AJ Capital Partners created an entirely new single-family development subsidiary focused on building communities in the Southeast. At present, the venture has 876 units under construction across four communities, in addition to plans for four more developments.
In September 2022, Tricon Residential announced a collaboration with the Arizona State Retirement System in a $950 million development venture for 2,500 homes in the Sun Belt.
Alfieri attributes the region’s job growth to increases in both population and industry interest. Jobs have been bolstered by corporate relocations and industrial investment. “It’s what we, and most developers, focus on; (Texas, Florida and Georgia) are ranked first, second and fourth in job growth,” he said.
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Others see the laxer regulatory market for property construction and the relative affordability of land as motivators for this growth. Hence the Sun Belt focus, LaRue noted, because “land is still attainably priced and there are not as many development restrictions.”
Difficulties, hurdles and advantages
Even with the high demand and abounding investment opportunities for single-family rental communities, the sector is subject to plenty of struggles, something that those in the space have both recognized and adapted to.
The demand for single-family rentals is reflective of some of the biggest plagues in real estate, including barriers to traditional homeownership. Those who rent the homes due to their similarities to traditional single-family homes often do so because of elevated interest and mortgage rates that preclude them from buying. “These conditions have driven many would-be buyers into the rental market, and often their ideal product type is a single-family rental,” LaRue noted.
Demand numbers and low vacancy rates also stem from a lack of availability, a struggle that, while exacerbated by supply-chain slowdowns, has been ongoing for a decade and a half. “We never quite recovered in terms of rebuilding after the great financial crisis, and these factors have increased demand,” said Savage.
Similarly, developers and investors encounter byproducts of these struggles in their deal making, particularly where interest rates are concerned. “(It’s been) traumatic. It’s the single-biggest challenge that developers have today, in both construction financing as well as equity financing,” Alfieri lamented.
At the same time, when deals do pencil out, they are often done with negative leverage and deflated loan-to-cost ratios, in part due to more cautious and hesitant lenders. “Rates have gone up so much that it’s difficult to underwrite these things to a level where the lender would be comfortable,” said Alfieri. “Values are coming down, and the profit margins for developers has changed dramatically.”
Despite this volatility, the sector’s long-term outlook remains positive, and deals are still worth signing, when the due diligence is done. “As long as we can stay within reasonable affordability bands, the single-family rental space and purpose-built rental housing will continue to perform well,” said Finlay.
