— By Adam Wolfson, CEO and CIO, Wolfson Development Co. —
The nation’s decades-long housing shortage and the recent rise of the build-to-rent (BTR) sector are inextricably linked. Although some may debate that one is caused by the other — or at least made worse — the important point is that the BTR industry was born out of the housing crisis.
The socioeconomic implication of homebuying versus renting may inspire an interesting debate, but it’s not germane to the essential fact that the United States does not have enough housing to meet existing demand. Indeed, it is estimated by the National Association of Realtors (NAR) that the country is 5.5 million homes shy of meeting demand. As long as this imbalance persists — and it will — BTR will have the market fundamentals needed to fuel its continued expansion.
To the uninitiated, BTR refers to entire purpose-built communities of detached single-family homes or attached townhomes that are for rent and run by a single owner or manager.
BTR can be thought of as a hybrid of single-family rentals (SFRs) and conventional apartments, incorporating the best parts of each. BTR has the on-site management, amenities, and geographic proximity lacking from SFR, and the three- and four-bedroom unit mixes, garages, and sense of privacy lacking from conventional apartments.
Not just a hybrid, BTR has its own set of characteristics that offer a compelling investment thesis.
Six Reasons to Invest in Build-to-Rent:
- Less cost, more rent — BTR can be less expensive to build than conventional multifamily, given the ability to build horizontally and forgo conventional multifamily features such as common areas, elevators and structured parking. BTR is also faster to build, which helps leasing velocity and lowers borrowing and carry costs. BTR deals can also command up to 30 percent higher premiums over multifamily, according to John Burns Real Estate Consulting. These characteristics can translate to markedly better build-to-cap rates.
- Financing efficiency — The scattered geographic nature of SFR homes means financing is more cumbersome and expensive. In the multifamily space, debt is often abundant and cheap due in part to centralized collateral. There are also many financing options, including Fannie, Freddie, life companies and CMBS. While the BTR community may look like it is comprised of SFR homes, it benefits from being financeable in the same way apartments are, and exit cap rates are generally equal to apartments, if not more aggressive in some cases.
- BTR can deliver long-term tenants — In the conventional apartment model, 50 percent of tenants move out at the end of their lease term. In the BTR and SFR space, the tenant is much “stickier,” typically staying in place 80 percent of the time and likely for as long as three years in one location, according to Walker & Dunlop. This means that the BTR space has lower turnover, less need for marketing, and ultimately lower staffing costs compared with conventional multifamily.
- Tenants view their residence as a home, and take care of the property — In addition to being a more permanent tenant base compared with conventional multifamily deals, BTR tenants typically view their residences as more of a home rather than a temporary apartment or “unit.” This means that they take care of their residence. BTR tenants also tend to have families and are generally older and more established and thus tend to prefer their living environments in better order.
- Property management costs are lower — In the SFR space, quality institutional property management can cost approximately 6 to 8 percent of effective gross income. Off-site management, leasing and maintenance staff and service cost more than on-site teams. In the BTR space, property management typically costs about 3 percent of effective gross income, which is about the same as a multifamily deal of institutional size.
- Good BTR deals are scarce — While multifamily projects aren’t easy to get off the ground, it is less challenging to find five to 10 acres in a good primary or secondary investment market than it is to find the 20 to 40 acres typically required for a scalable BTR project in the same type of area. The reason is apartments are built vertically while BTR projects are built horizontally. There are only so many 30-acre parcels next to good schools and employment opportunities in the markets favored by institutional investors. This means good BTR deals should be in greater demand than their corresponding apartment projects in the same markets.
If these drivers listed above make a persuasive case for you, you would not be alone in that assessment. Investors have certainly taken notice as well with more than $50 billion of institutional capital committed to the space overall, according to John Burns Research and Consulting. These are strong tailwinds for the sector to be sure. But as strong as they are, the real driver here is more compelling yet more fundamental: supply and demand. Put simply, it is a mathematical impossibility that developers will build enough for-sale or for-rent residential real estate to solve America’s housing crisis in the coming decade. In other words, demand will outpace supply for the foreseeable future, which will benefit BTR.
Some understandably argue the downsides of a new generation that does not own their own homes. But the fact remains that people want and need more space. Tenants today have pets, relationships, work-from-home scenarios and families. All these preferences require more space than a traditional apartment can provide.
For people who can’t afford to buy but still need the space, BTR provides a quality newer home in a safe and amenitized community tailored for their growing households. The merits of owning versus renting houses are debatable, but just because someone can’t afford to own a home does not mean they don’t deserve to live in one.
Adam Wolfson is the CEO and CIO at Wolfson Development Co., a Miami-based real estate investor, developer and fund manager. The company currently has approximately 2000 units in its development pipeline.