The current housing market along with rising interest rates is forcing a lot of buyers into renting instead. A large portion of these buyers were in the market for single family starter homes, but were left with apartments being their only option. With a lack of affordability and supply of single family homes and apartments not offering the same size and privacy as single family homes, there became a gap in the housing market. Many multifamily developers and investors have found the solution to this supply and demand issue and are developing build to rent (BTR) communities. BTRs are not only filling the country’s housing gap, but are turning out to be a reliable revenue source as well.
Driving the Trend Upward
A combination of factors are influencing the rapid growth within the BTR market. Millennials make up the largest population in the current housing market, but many have given up on trying to buy a home, thus creating a huge demand for rentals. Another reason there are less buyers in the market today is due to costs of homes skyrocketing and income not keeping up nearly the same pace. Buyers who intended to buy a home have been priced out over the last two years. Even when interest rates dropped in 2020, homes were in high demand and many buyers were priced out. Now that interest rates are climbing, many people cannot afford to own a home and are forced to rent.
With so many single family buyers entering the rental market, apartments and townhomes are not meeting their needs. Apartments do not offer the space or privacy needed by most single families. While apartments do offer convenient amenities they are geared towards a one to two person household. Outdoor spaces are communal, parking can be difficult, and noise is a large complaint due to the close proximity of units.
BTR communities are attracting renters with wants and needs associated with owning a detached home. These renters want their own yards, their own parking, multiple bedrooms and bathrooms - the qualities that make up the perfect starter home.
As a result of the pandemic, many people have fully transitioned to working from home. This brings even more renters into the single family rental market. Individuals can now live in more affordable, suburban areas given that their commute to work is no longer a factor.
Benefits and Risks for BTR Investors and Developers
Many real estate investors and developers understand the growth and profitability and are eager to grow their portfolios within the BTR space.
With BTRs, investors are seeing more reliable revenue as renters of single family homes are more likely to remain as tenants over time. The issues we are seeing in housing affordability, supply, and the consistent need for housing is creating a perpetual demand for single family rental communities.
Green Street reported on a recent analysis which found BTRs providing an 8.0% return1, putting them on top of all other real estate asset classes for risk-adjusted returns. This alone is drawing attention from investors and developers who want to get in on the action.
While there are many factors pointing to profitability and opportunity to solve the country’s housing issue, BTRs do not come without some risk and cause for consideration. It is very hard to find the land to accommodate these horizontal housing communities. Although the population of renters is large, these types of homes are drawing in a specific demographic, therefore location is a huge factor in determining success. Finding land in the right area, of the right size, is proving to be difficult.
The rapid growth in demand for single family rentals has also driven up the cost to rent them. This is advantageous until those renters are eventually priced out and forced back into apartments and multifamily housing, causing the BTR space to slowly decline.
Despite these potential challenges, the near future dictates likely growth for the BTR market. As this market grabs more attention, it is expected to see an influx of capital suppliers, operators, managers and builders entering this sector.
If you’re interested in growing your portfolio using build to rent communities, CALCAP Lending offers debt solutions.