One of the fastest-growing segments of the U.S. housing market? According to recent research from Berkadia, it’s built-to-rent single-family homes, homes that look like traditional single-family residences but are built to be rented, not owned.
A new report from Berkadia, Single-Family Rental & Build-to-Rent: The Emergence of a Leading Class, finds that developers are boosting the supply of single-family housing in the United States that is built for renters, not owners.
And Berkadia’s researchers only expect more built-to-rent single-family homes to pop up across the country in the coming years.
What’s behind the growth in built-to-rent single-family housing and why are so many renters choosing these properties instead of traditional multifamily properties? We spoke with Jeff Coles, vice president of client services at Berkadia, about the growth in the build-to-rent market and why this real estate model is gaining in popularity.
Why has built-to-rent housing become so attractive today?
Jeff Coles: It really starts as a response to the changing lifestyle needs of Millennials, Gen Zers and even Baby Boomers.
Millennials are reaching major life milestones. They have needs that require housing products. But they are hampered by a lack of savings. Single-family homeownership might not be attainable to them. It can be difficult for Millennials to save for a home. Home prices are high. Mortgage interest rates are high. It’s hard to achieve the goal of homeownership, so many younger buyers are turning to single-family rentals.
At the same time, Millennials and Gen Z are renters by choice. They are transient in nature. They are the generation of commitment-free consumers. They like the flexibility of renting.
Baby Boomers are interested in single-family rentals, too. They like the financial flexibility that renting a home gives them. They like that additional liquidity that they normally wouldn’t have because it’s usually tied up in a home that they own. They like certain product types of built-to-rent properties, the horizontal, one-floor, ranch-style properties. They don’t have to deal with stairs.
It’s added up to rising demand for built-to-rent housing.
Why are these renters choosing single-family homes instead of traditional multifamily properties?
Coles: Renters really like and expect a home-like feel and the finishes that single-family residences provide. Built-to-rent single-family homes are built just like traditional for-sale single-family homes. They have the additional storage space that you don’t always get in apartment units. They often have garages. They feel more like homeownership.
Then there are the amenities. Many of these built-to-rent homes are built in communities. They come with clubhouses, dog parks and that community feel. They have professional property management in place. The people who rent in these built-to-rent communities don’t have to worry about the property upkeep and expenses that come with homeownership, but they get many of the amenities and extra indoor and outdoor space that come with a single-family home.
Are today’s higher interest rates boosting the demand for single-family rentals?
Coles: As interest rates rise, mortgage interest rates typically do, too. Those higher mortgage rates push prospective buyers into the rental market. As borrowing becomes more expensive, that leaves less money for housing. The overall cost of living goes up and that leaves less money for families for housing.
Built-to-rent housing provides families with the opportunity to live in a higher-priced neighborhood with better schools. They might not be able to afford that neighborhood if they are instead buying a home.
In what parts of the country are you seeing more built-to-rent single-family housing?
Coles: That’s a tricky question. It comes down to the cost of land. Does the land cost provide the opportunity to build an affordable product that will meet the return requirements for investors? Areas with higher housing prices have higher land costs that make it prohibitive for built-to-rent product.
There has been a migration to the Sunbelt states because of employment growth. Costs are lower there, too. That sets the stage for the growth in built-to-rent housing. There is a demand for exurb living, too, in areas like Phoenix, Dallas, Southeast Florida and Charlotte. Those markets have all been successful ones for built-to-rent housing.
The Midwest is one of the larger areas where we are seeing a growth in built-to-rent single-family housing. This product works well in the Midwest.
Do you think the growth we’re seeing in this sector will continue?
Coles: I think so. It is a change in mindset and demands. There is the growth of this commitment-free consumer lifestyle that has permeated the Millennials and Gen Zers. Hybrid work-from-home policies are here to stay, too. Families and households require workspace in their homes. That won’t change. Bult-to-rent single-family homes provide that extra space for workspaces.
As we continue to see a shortage in the supply of housing and a need for additional living space, a demand for this product type will remain.
Investors like this product type, too, right?
Coles: They do. The rent growth is higher than what we see in traditional apartments. There are higher occupancy rates for these properties and higher retention rates. Operating expenses are lower. All of this will continue to fuel investor demand.
Right now, built-to-rent homes are providing better returns and yields than probably any other asset class out there. There is also the potential to convert this type of housing into traditional for-sale housing in the future. Say interest rates lower. There might be more demand for for-sale housing. Owners then have the potential to convert this type of housing from rental to for-sale if that’s what the market demands.
What amenities are people who buy into built-for-rent homes looking for?
Coles: They want the look and feel of a home and neighborhood. That is first and foremost. They don’t want to come home to something that feels like a traditional rental product. They like walkability and a neighborhood feel.
They also like the extra space. If you give someone a garage, not only can that person park a car, he or she can store a lot of stuff. And when people store a lot of stuff? They’re not going anywhere else anytime soon. They are not going to move out in a year. They’ll typically stay two, three years or more.
A fenced backyard is even more important to them. If you give people a community feel with housing built like traditional homes with the type of modern fit and finishes that come with traditional single-family homes? That’s attractive to a renter.
Are built-to-rent single-family homes usually located in walkable areas close to shops and restaurants?
Coles: They often are built in communities that have the feel of an urban neighborhood but in a suburban setting. It’s not like the traditional suburb where there are no amenities within walking distance. With these, there are usually mixed-use centers that are close by. That’s not the case everywhere, of course. Some are in suburbs that lack walkability. But a lot of these built-to-rent communities are developed within walkable neighborhoods.
Is new construction still taking place in this sector, even with higher interest rates?
Coles: They are still building. It comes down to the ability to access debt. That has absolutely become more difficult to do. The people who are going to be successful in this space are the ones who have projects that can come out of the ground in 2024 and 2025, the people who have been able to capitalize these projects despite the restrictions to construction lending. There is a need and demand for this type of housing. There is a lack of supply in this space. Those who can develop new products now will reap the benefits.
