Rental Housing’s Better Mousetrap – Oct. 21, 2024
Estimates vary on just how large the supply shortfall really is when it comes to housing in the U.S. Zillow estimates the shortage at 4.5 million units, while the Pew Charitable Trust puts it at somewhere between four and seven million. Other estimates come in between three and four million. Regardless, a shortfall of that magnitude demands solutions.
One of these solutions may be found in a housing sub-sector that has only begun to achieve scale in the past few years: build-to-rent (BTR, sometimes known as build-for-rent). Although single-family rental is not a new concept, the idea of translating this model into a single-site, multi-unit community is a more recent innovation, one that has attracted institutional-level interest from investors and developers.
CBRE lays out the case for BTR as an investment target in a new report. Renter demographics and lower tenant turnover compared to traditional apartments are just two of the factors in the sector’s favor. Another is that despite all the attention being paid to BTR lately, institutional exposure is still relatively low.
Among the key findings of the report are the following:
- Booming BTR Market: “Despite a relatively small current inventory (around 350,000 units), the BTR sector is poised for further strong long-term growth—a projected increase of nearly 50%. This surge reflects the widening affordability gap between homeownership and renting, and a growing preference for flexible, amenity-rich rental communities.”
- Millennial and Empty Nester Appeal: The high cost of homeownership—the monthly mortgage payment currently exceeds the average monthly rent by 37%—makes BTR “particularly attractive to millennials starting families and empty nesters seeking financial flexibility and lifestyle ease of renting versus owning,” according to CBRE. “Both groups are fueling demand for large BTR developments.”
- Resilient Investment: Although BTR investment saw a 40% drop last year from its peak of $1.6 billion, “this is still more than double the average level before the pandemic, demonstrating strong investor confidence in the sector’s robust revenue growth and lower resident turnover.” (News flash: Virtually every commercial property type saw a double-digit decline in sales volume in 2023.)
- High Demand, Strong Returns: “The average monthly BTR rent reached $2,181 in [the second quarter of] 2024, with a year-over-year increase of 1.5%—significantly outpacing traditional multifamily rent growth (0.3%).” Moreover, unlike conventional apartments, BTR rents didn’t suffer a major hit during the pandemic, thanks to BTR benefiting from the same out-migration trends that buoyed for-sale housing in the suburbs.
“Build-to-rent is a vital part of the solution to the housing shortage, providing high-quality, family-friendly rental options with unparalleled flexibility,” said Matt Vance, Americas head of multifamily research for CBRE. “Five years of consistent growth and strong market fundamentals have attracted substantial institutional investment.”
The origins of that institutional participation can be traced to the Great Recession, when a handful of well-capitalized private equity players began assembling scattered-site SFR portfolios, taking advantage of a large supply of foreclosed homes that could be acquired at a low basis. Although managing these portfolios over a broad geographic radius was a challenge, CBRE notes that consumer demand was strong “and led to outsized investment performance.”
Fast-forward to 2024, and the proverbial better mousetrap has arrived in the form of BTR development and acquisition. Development continues to be hampered by constraints on construction debt. However, CBRE notes that lenders’ tight grip on the purse strings creates opportunities for limited partners to provide equity. As for acquisitions, CBRE advises focusing on stabilized portfolios, “since deal flow will likely be modest over the next 12-24 months.”