Build-to-rent on track to see 14K units deliver this year. What happens next?
By Ashley Fahey
Tampa Bay Business Journal
Published: Jan 24, 2022

The buzzy build-to-rent sector is just getting started.

Purpose-built rental housing is expected to see its most prolific year ever, with nearly 14,000 new units set to open in 2022, according to a recent study by RentCafe. That'll surpass last year's record-breaking delivery of 6,740 new build-to-rent homes.

Keaton Merrell, managing director of capital markets at commercial real estate financial-services firm Walker & Dunlop (NYSE: WD), said an estimated 500,000 starts are expected in the next five years within the build-to-rent sector.

"So much equity has poured into the space," Merrell said. "It's all over the United States."

Partnerships are being formed seemingly daily to capitalize on the sector. Last week, Indianapolis homebuilder Onyx+East and New York-based Pretium Partners LLC, an investment firm that specializes in single-family rentals, formed a new joint venture for build to rent. The partnership will invest about $600 million in developing and operating new single-family build-to-rent communities across Onyx+East's key markets, including Indianapolis; Columbus, Ohio; Cincinnati; Tampa, Florida; and Kansas City.

Kelli Lawrence, CEO of Onyx+East, said the joint venture will break ground on about 2,000 build-to-rent units in the next two to three years.

"We were watching what was happening in terms of consumer dynamics and opportunities for growth," Lawrence said. "The build-to-rent opportunity really fit our capabilities and expertise in different markets than our for-sale brand."

Onyx+East typically builds for-sale homes in urban or infill locations. The build-to-rent product it'll develop will target more suburban areas, a common trend within the sector. RentCafe found 61% of U.S. single-family rentals are in suburban locations.

It speaks to a key trend that's been sped up by the Covid-19 pandemic: People are looking for more square footage, including work-from-home space. And with even more mobility today, some people are trying out new cities or submarkets within their existing metro area. Build-to-rent is a way to try out new places before purchasing a home, Lawrence said.

That's part of the market the build-to-rent sector fulfills, in addition to would-be first-time homebuyers finding the housing market too competitive right now.

A growing list of homebuilders, ranging from small to midsized firms like Onyx+East to giants like D.R. Horton Inc. (NYSE: DHI), are embarking on new build-to-rent offerings. Meanwhile, those same builders are frequently competing with build-to-rent groups, which include apartment developers, to buy land to develop high-in-demand owner-occupier housing.

Doug Ressler, manager of business intelligence at Santa Barbara, California-based Yardi Matrix, said more for-sale homebuilders are entering build-to-rent today because of the sustainable demand and positive cash flow the sector affords.

"The shortage of housing is not a quick fix," he said. "It’s going to be with us for a decade. (With build-to-rent), they see the ability to get into a market early enough to reduce costs, where there’s strong demand and a lack of affordable housing, and be able to make very positive cash flow occur."

The past two years have been marked by a lot of new construction in build to rent, with more properties delivering and leasing up this year than ever before. But what happens next?

Merrell said build-to-rent properties once had capitalization rates about 100 basis points wide of traditional multifamily. While build-to-rent predates the pandemic, especially in places like Phoenix, the sector hasn't become mainstream for financial sources and others until very recently.

He said, right now, there's probably little difference in build-to-rent and multifamily cap rates, and expects build-to-rent to actually start trading inside of traditional multifamily before long. That's at least in part because build-to-rent properties usually have higher rents, lower expense ratios and tenants that stay longer than in an apartment community, Merrell added.

Ressler said both the single-family rental and build-to-rent markets are relatively new asset classes and lack the traditional multifamily cost history and pricing. but developers and lenders are excited about the opportunity the sector presents.

Strong demand and interest from Fannie Mae and Freddie Mac have also helped lenders get behind the asset class, Ressler said.

One of the big questions within build-to-rent: whether the sector will eventually unlock homeownership opportunities. Could today's build-to-rent unit become tomorrow's single-family home?

A lot may depend on how a build-to-rent development is platted, Lawrence said. For example, if all build-to-rent units in a development are individually platted, it's possible to eventually sell one build-to-rent unit to an owner-occupier. But if all units are on one plat, akin to a typical multifamily community, the property is more likely to sell collectively to an investor.

"I think we'll see a lot of variety in terms of how these communities evolve," Lawrence said.

Merrell said equity sources sometimes actually prefer build-to-rent properties that are built on individual parcels, as that could allow for an alternative exit.

Ressler said the possibility of build-to-rent units becoming owner-occupied homes has been hinted at but hasn't come to fruition yet.

"As the buildings age and they progress and build up a certain amount of core profitability or demand, eventually, that transition will occur," he continued. "It’s not evidentiary right now."

Harvard University's Joint Center for Housing Studies, in its recent America's Rental Housing 2022 report, found 16% of single-family homes, or about 2 million units, that had been rented in 2017 become owner-occupied in 2019. That suggests some amount of rental stock does get converted into more typical single-family housing over time.

"Given the limited inventory of homes on the market, additional conversions of single-family rentals to owner occupancy are likely," the report noted, adding starts of larger multifamily buildings continued at a strong pace in mid-2021.