“The communities feature amenities that include swimming pools and parks. For consumers who want the whole house to themselves lifestyle without the mortgage, these little charmers are fitting the bill.”
The rental market is hot. Since the start of the Great Recession, the number of Americans living in rental properties has soared to nearly 37%, the largest amount since 1965. Over the same period, households lived in by owners are at an all-time low, according to Census Bureau data.
The demand for new build-to-rent product is being driven by demographic shifts resulting in more households being in the stage of life where single-family housing better suits their needs, and the housing affordability challenges that are keeping many households, especially first timers, out of the for-sale market. This has been due to higher costs for labor, land and materials, driving builders to build larger and more expensive homes. The end result is increased demand for more rental housing, and single-family homes for rent meet the needs of maturing renter households ready to move up from apartments but not ready or able to buy.
Single-family for rent is the fastest-growing segment of the U.S. housing market, according to an analysis by the Urban Institute, which reports that growth in single-family rentals has outpaced the growth of both single-family for sale and multifamily housing in recent years – and it is predicted to keep growing in the years ahead.
According to the U.S. Census Bureau, almost all of the 15 million single family for rent units are individually owned by mom-and-pop landlords, which means they’re geographically scattered and often don’t offer any amenities. Further, institutional firms like American Homes 4 Rent, Starwood, and Blackstone have gained attention in recent years for bringing big money to the single-family rental scene as they quickly bought up distressed properties and priced many single-family landlords out of the market, but they still encounter problems with managing homes that aren’t located together. That’s where build-to-rent developers like AHV Communities, BB Living, and Christopher Todd Communities benefit by creating entire communities and neighborhoods that are newly built and managed exclusively for rental purposes
According to John Burns Real Estate Consulting, at least 10,000 build-for-rent houses have been constructed over any given 12-month period since the early 1980’s. By the mid-2000s built- for-rent production peaked at 45,000 units over a 12-month period. Since the housing bust, built-
for-rent production has steadily risen. One of the new wrinkles on the idea is combining the units into entire communities. That new product in the multi-family market offers cohesive single- family rental communities filled by niche renters with lifestyle needs that are unlike those of apartment renters.
Traditional single-family home rental communities may have their own amenities or have access to the broader for-sale community’s amenity package. Front yard maintenance is typically included in the rent, and the homes typically command a five to 20% (or more) premium on a rent per square foot basis over the non-professionally managed sector (homes rented out by mom and pops) of similarly sized homes of comparable quality given the level of maintenance and professional management received. These conventional detached single-family homes are typically sized between 1,400 and 2,200 square feet, much larger than the “horizontal apartments” product discussed below, which appeal more to non-family households than traditional detached single-family homes.
The conventional single-family rentals achieve absolute rents well above apartments, though per square foot rents are lower. Horizontal for rent neighborhoods feature single-level, detached homes for lease in a gated enclave. The one, two and three-bedroom floor plans feature private entrances, outdoor patios, and backyards. The interiors feature 10′ ceilings, granite/quartz countertops, and stainless-steel appliances. They are marketed as pet friendly communities, offering optional garages, community pools, and landscaped recreation areas that are all maintained by a professional management company, without mortgage payments or HOA fees
According to Mark Taylor, an Arizona Class A multi-family investment management company with 35 years of experience with $4B under management having leased up approx. 2,000 SFR units, notable SFR demographics include:
- Turnover for SFR product is 49% vs. 56.2% for other multi-family
- Average household income for SFR is $118,008.
- Average household income to rent ratio for SFRE is 17%
- 61% of residents are pet owners vs. other multifamily product
Currently, approximately 6% of new single-family homes are purpose-built for-rent, which would result in approximately 700,000 new units over the next 10 years. Given demographic trends RCLCO forecasts much greater demand than the current pace of production, which could result in a significant supply shortfall, suggesting the sector presents a strong market opportunity in the coming decade.
Developers are utilizing residential construction methods that allow for phased delivery and leasing, which allows for cash flow generation during construction. Additionally, the Horizontal construction allows a builder to move housing quickly eliminating the stress of waiting for
buyers to trickle in. It helps builders get through the process faster than with traditional one-off sales. Whether the homes in a subdivision are sold individually, or a block of homes are sold to investors or SFR developments or the builder never sells and continues to own and manage the properties, the multiple exit options available with this business model are something that’s really appealing to mass builders and residential land developers. benefit by selling a share of their community to investors
Given the anticipated undersupply of single-family rentals for the foreseeable future, this segment represents a strong opportunity for investors, builders and developers to create new rental home communities in a variety of formats, serving a growing market.
Lennar Homes, JMC Homes, AHV Communities, and Camillo Properties are also building thousands of homes for rent in various places nationwide. American Homes 4 Rent (AMH), which leases 53,000 houses (mostly acquisitions) across 22 states. Toll Brothers has formed a
$400 million joint venture with a financial partner and an established build-to-rent developer called BB Living.
Hamilton’s most recent SFR financing successfully sourced debt and equity financing for a ground up development in the Phoenix area. The capital stack included a non-recourse bank senior construction debt facility and JV equity. This equation yielded a blended interest cost to our client of 9%.
NOTES:
Blackstone Group Inc., Brookfield Asset Management Inc. and JPMorgan Chase & Co.’s asset-management arm have each made fresh bets on the industry since Covid-19 cases started surging, targeting a type of property big investors ignored until 10 years ago.
The investments come as publicly traded single-family landlords outperformed apartment owners, and social-distancing efforts make traditional commercial real estate, including hotels and retail properties, less appealing. said Dana Hamilton, head of real estate at Pretium, whose Progress Residential manages roughly 40,000 rental homes. “Single-family rentals” have been an island of strength during the storm
There is financial significance in what we have created, and Inland understands that. They are very savvy investors with in-house expertise commensurate with their $2 billion worth of real estate p the
“build-to-rent” niche comprises only 5% of homes built, but it is growing rapidly and highlighting some important emerging trends in housing demand.
SFR developers are combining home designs, lifestyle, technology and resident engagement commands faster lease ups, 25-30% higher rent rates, and 50% higher resident retention, which all lead to a strong investor value.
Many households make a conscious decision to rent not simply because it is more affordable, but also because it provides them with more flexibility, i.e. not having to tie up a lot of savings in a property, as well as allowing them to rent in a more convenient location
A quantitative analysis conducted by RCLCO found that these developments have achieved an average premium of 16% (on average rent per unit) over newest nearby traditional apartment communities. What is even more striking is that the premium grows to 24% after adjustments are made to normalize for unit size, age, and location
The homeownership rate of Millennial households is below that of Gen Xers and Baby Boomers at the same age, in part because they’ve saved less for a down-payment due to economic circumstances, student loans, and other debts. They are either entering their family formation years or a period of time where traditional apartment living has become less desirable, and the single-family housing lifestyle is appealing, but ownership attainability is at a low point. While many lack the resources to purchase, they are attracted to the lower density and private outdoor spaces that single-family rentals offer, but without the down payment and commitment of ownership.
Hamilton Realty Finance with offices in the bourgeoning SFR footprint in Arizona, Colorado, Texas, Nevada and Utah has substantial experience and reach to finance ground up development and acquisition of this exciting profitable new twist to multi family living.
Sam Leopold
HAMILTON REALTY FINANCE
8333 Douglas Avenue, Suite 900 | Dallas, TX 75225
O 214.540.0531 | M 602.549.8400 | sleopold@hamilton.com