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Build to Rent

BTR Is Proving It’s Built to Last

Investors are Flocking to BTRs as a High Performing Asset By Greg Godderidge Once occupying a small niche in the market, Build-to-rent (BTR) has emerged as the dominant acquisition model of the single-family rental (SFR) sector. Fueled by the persistent lack of existing homes for sale and growing demand for single-family rentals, BTR came into its own in 2023. The model attracted the attention of large institutional investors who recognize the valuable role BTR can play in creating much needed housing supply and offering high quality single-family living for families who have been shut out of the purchase market. An Urgent Need for Housing Supply Since the beginning of the COVID-19 pandemic four years ago, the housing market has been on a rollercoaster ride. After a frantic homebuying frenzy through 2020 and 2021, the purchase market cooled significantly in 2022 and continued at a slow crawl in 2023. Mortgage rates and home prices surged, and average monthly mortgage payments hit record levels, exacerbating the affordability crisis. With mortgage rates rapidly increasing from 3% at the start of 2022 to nearly 8% in 2023, we saw a new phenomenon, the “lock in” effect, which kept potential sellers unwilling to give up their low mortgage rates “locked into” their homes. This only worsened the enduring housing supply shortage, which is projected to continue through the end of the decade. Earlier this year, Moody’s Analytics estimated there is a total housing deficit of 1.5-2 million units, a number that clearly indicates we are still many years away from a balanced market. The shortage is even more severe for affordable housing. A recent Fannie Mae study estimates a shortage of 4.4 million affordable single-family units for both renters and homeowners. This extreme shortage of homes available for both purchase and rent is one of the main factors keeping prices high, thanks to the imbalance of supply and demand. The Urban Institute addresses this in a new report published in January, “Place the Blame Where It Belongs,” which identifies high home prices are “caused by more robust household formation relative to increases in the housing stock.” The report goes a step further to exonerate common scapegoats, including developers and investors, which it argues are not responsible for the supply crisis. In fact, the report suggests the most critical solution to the supply shortage is the most obvious: create more supply. BTR is helping with that. BTR Helps Create Supply Builders became an important source of new supply in 2023. According to John Burns Research and Consulting, builders made up 30-35% of home sales last year, up from the typical range of 12-15%. However, with prices and mortgage rates high, many prospective homebuyers were edged out of the purchase market. The Wall Street Journal reported the cost of buying in 2023 was 52% more than renting, a 30-year high. In response to this economic reality, a growing number of homebuilders began shifting their projects toward build-to-rent communities. As the current market dynamics favor renting over buying, there is an increased demand for single-family rentals. Multifamily rentals in urban centers are losing favor with the millennial generation as the desire for more space to raise a family and work from home have shifted the preference to suburban single-family homes. Many families would still like the benefits of living in a larger, traditional single-family home, but without the burden of a down payment, high-interest mortgage, and unmanageable maintenance costs. The demand for single-family rentals to accommodate the lifestyle of modern millennial families has driven demand to a new niche market: luxury single-family rental communities with amenities like pools, fitness centers, playgrounds and walking trails. Builders have been working hard to meet the surging demand. According to Census Bureau data, the number of single-family build-to-rent (SFBTR) construction starts were up 33% in 2022, with 69,000 homes under construction. New development surged in 2023 as well. Northmarq’s Single-Family Build-to-Rent Report from December 2023 noted approximately 70,000 single-family rental homes were completed in the first three quarters of 2023, up 35% from the same period in 2022. While this production activity is sorely needed, the BTR industry will not be able to solve the much larger issues behind the supply and demand imbalance alone. The most effective way to restore balance to the housing market nationwide is through federal housing policy. Investors Take Note As the scarcity of resale supply bolstered the demand for new homes in 2023, the build-to-rent market attracted the attention of institutional investors. Institutional purchases of scattered homes cooled in 2023 as home sales plunged nationwide. Investors like Invitation Homes and Tricon turned to build-to-rent communities. A number of large projects were completed in 2023, adding much-needed inventory to the single-family housing market. In September 2023, a joint venture of Tricon Residential, Foremost Pacific Group and Woodbridge Pacific Group opened a 170-unit built-to-rent community in Wildomar, California. Earlier this year, Blackstone announced a $3.5B deal to acquire Tricon, indicating continued interest in the BTR sector from institutional giants. Around the same time, American Homes 4 Rent announced a $625 million joint venture with J.P. Morgan Asset Management focused on constructing and operating newly built rental homes, and Invitation Homes established a new build-to-rent team to manage its construction pipeline. Outlook for the Future There are many reasons to expect long term growth and stability in the BTR market. Multiple trends are converging to drive and sustain demand for the foreseeable future. »          The housing shortage is expected to persist for years to come, forcing SFR investors to create their own supply. »          BTRs offer investors a differentiated product with similar operating features to traditional multifamily housing. »          Demand for rentals will remain high from Millennials and the emerging Gen Z population who may be priced out of the homebuyer market in many areas or who simply prefer the flexibility that comes with renting. »          Money continues to flow into the BTR market. Single-family homes built to rent are delivering strong returns to investors. »          BTR may

Single-Family

For SFR, Adversity Is in Our DNA

It’s Far Too Early to Write Eulogies for the Late, Great SFR Market By Greg Godderidge From humble beginnings, the Single-Family Rental (SFR) market has grown into an asset class worth trillions of dollars. Today, institutional investors own approximately 500,000 properties of the 16 million single family rental homes nationally, representing a fraction of all rental units in the United States. But their importance to the national housing industry is unquestionable, as they provide consumer choice, professionally managed properties, and an attractive alternative to the traditional multifamily or apartment rental options. With the housing market going through a period of correction caused by the Fed’s mandate to tame inflation, the industry is enduring its first stress test since the Great Recession. Acquisitions have slowed while warehouse financing and securitization deals have been put on ice after the Fed’s unprecedented interest rate hikes beginning in March of 2022. Will the SFR Asset Class survive the challenge? For those questioning the ability to weather the storm, let’s remind them that the SFR business was born out of adversity and is built to withstand imperfect market conditions. A Look Back at History Let’s take a quick look back at the origins of the SFR industry. The Great Recession and the collapse of the mortgage market led to a surge in foreclosures, which peaked in Sept. 2010, when approximately 120,000 homes were repossessed in a single month. With the sudden inversion of supply and demand, home prices plummeted. In those years, real estate was considered an undesirable investment. Some bold investors were not intimidated by the grim market conditions and began acquiring foreclosed properties to rent out while they waited for the market to recover. We owe thanks to those trailblazers who took a chance on a “risky” investment that many others were shying away from as property repossessions were sweeping the country. Brave investors brought activity back to an otherwise lifeless housing market and ultimately helped stabilize home values and propel the housing market’s recovery. They also provided affordable housing solutions for families recovering from the financial crisis. These investors realized the cash flow, low interest rates, and steady price appreciation were a profitable recipe. The business model’s early success attracted the attention of more capital markets participants and large institutional investors who could aggregate a significant number of rental properties. Thus, from the ashes of the foreclosure crisis, the Single-Family Rental asset class emerged in 2012. For the next ten years, the SFR market enjoyed steady growth, with an entire cottage industry of vendors, management companies and outsourcers sprouting up to support it. Big operators such as Invitation Homes, American Homes 4 Rent (now AMH), Tricon and others established a new standard of living for suburban renters with professionally managed properties and amenities. The COVID-19 pandemic accelerated all the positive housing trends and drove even more demand for maintenance-free single-family living, igniting a boom in the SFR space. The market conditions through the pandemic solidified the SFR industry’s position as the “darling” of the real estate asset classes. The SFR industry continued to outperform expectations with a record number of securitizations, new market entrants, and expanding warehouse banking lines. The picture became a little less rosy in 2022 when the Federal Reserve cranked up interest rates to tame runaway inflation. The Current Market Now that we have entered a slower period for the housing market, the explosive growth of SFRs has slowed with it. Investor activity is down due to the run-up in borrowing costs and cap rate constriction. Rent growth has also softened in recent months. Despite these pressures, the underlying fundamentals of the SFR market remain strong: Cash flow remains steady and valuations have normalized. The major players continue to report strong financial results. AMH’s same-home average realized rent rose by 8% in 2022. At Tricon, same-home rent grew by 7.3% in January of this year with solid growth in new leases and renewals, and same-home occupancy holding steady at 97%. They are proving the SFR asset class is well designed to perform in adverse conditions. There is still plenty of appetite from investors who are waiting patiently on the sidelines for conditions to stabilize. Once the market settles into a clear pattern, we can expect the growth of SFRs to resume. Analysts are currently debating what that sweet spot will be for homebuyers and investors to jump back into the market. A report by John Burns Research & Consulting found that 5.5% is the magic rate to reinvigorate the mortgage market. Even if we never see rates drop down to 3% again, if mortgage rates stabilize in the 5.5% range the market can adapt and begin to build a foundation for future growth. While waiting for the market to establish a new trend, investors should take the opportunity to review their inventory, assess their risk, and make any necessary adjustments. That could mean reviewing and streamlining current in-house capabilities or talking with an experienced outsourcer. Partners who can deliver asset management technology, scalable full-service support, and access to a network of vendors will be valuable in this time to help investors manage their portfolios and potentially mitigate losses. An outsourcer with a nationwide footprint like the homegenius family of companies, and its affiliate Radian Real Estate Management LLC can help investors finetune and execute their SFR strategies in different markets across the country. Overall, this is a moment to be cautiously optimistic. As inflation moderates, interest rates should also decline toward the 5.5% sweet spot. Home prices have fallen from their peak, which means there are new opportunities for investors to grow their portfolios. With affordability still an obstacle for many would-be homebuyers, the rental market will likely remain strong. And behind it are secular trends such as suburban migration and work-from-home arrangements that are relentlessly driving demand for SFR properties across the country. It is far too early to write eulogies for the late great SFR market. The fundamentals of the market are too strong and vigorous.

Single-Family

The Single-Family Rental Market Has Become a Search for Supply

Investors Are Exploring New Ways to Expand Supply by Greg Godderidge The durability and stability of the Single-Family Rental (SFR) market is one of the few real estate investment bright spots of the past year. If the 2020 trend continues, the SFR asset class is positioned to be one of the biggest stories of 2021. With the backdrop of a national housing supply/demand imbalance, the SFR growth trend is so strong that a new Build-to-Rent (BTR) micro-SFR market has been created by enterprising and forward-looking market participants for the purposes of creating additional rental housing stock. Build-to-Rent single-family homes coupled with traditional single-family properties are forming the backbone for a vibrant SFR industry. What is driving this demand for tenants, builders, and investors? And is there a role for evaluation service providers? According to the Census Bureau, occupancy rates across all single-family rentals averaged 95.3 percent in the third quarter of 2020, holding steady from the second quarter, following a 100-basis points spike from the first quarter. That is the highest reading for the SFR market since 1994. From their 2007 lows, occupancy rates for all SFR properties are up by 5.6 percent. What’s driving occupancy rates skyward is a combination of relentless demand and evaporating supply. Increasing numbers of Millennials have been fueling demand as they have formed families and moved out of multifamily properties. The COVID crisis accelerated demand for SFR properties as tenants have moved from cities in search of more indoor and outdoor space. At the same time the traditional sources of rental property inventory have dried up. Foreclosures are on hold nationwide, retirees who are usually looking to downsize are staying put during the pandemic, and it is getting increasingly difficult to find mom-and-pop property owners seeking to sell. Creating New Supply Together, those pressures have spurred home builders to create additional supply. Build-to-rent properties have been on an upward trend for the last two decades but have skyrocketed in the past year. There were more than 14,000 BTR starts in the third quarter of 2020, representing a 27 percent pop over the previous year, according to the National Association of Home Builders. Investors have taken notice, attracted not only to the steady cash flow of rental properties but also its stability. The most attractive element is opportunity. The SFR market is still small and fragmented with the 20 biggest single-family rental operators controlling only about 300,000 units. That leaves roughly 16 million rental units nationwide that have not yet been aggregated and securitized. Expansion into this vast untapped sector of the market is dependent on the ability to review and evaluate properties at scale. This has been a challenge during a public health crisis when in-person and on-site inspections are limited. Radian offers a range of services to facilitate securitization of SFR and BTR properties. Our collateral review and validation services include a thorough review and validation of sponsor and/or borrower data, property documentation and loan files. This is especially important for large institutional investors. In fact, we have served as diligence agent for every institutional SFR securitization transaction to date. Professional due diligence services allow buyers to have more control over their acquisitions and at the same time give lenders an extra level of confidence in the quality of the transactions they underwrite. SFR Market Being Driven to New Heights Currently, approximately only 6 percent of new single-family homes are purpose-BTR, which should contribute about 700,000 new units over the next 10 years. That is not nearly enough to meet demand, says real estate advisor RCLCO. Based on current trends, RCLCO believes the SFR market will likely be undersupplied over the next decade, despite the increased attention the segment is currently receiving. A historic confluence of economic, demographic, and public health trends is driving the SFR market to new heights. As the market matures and earns more recognition as its own asset class, new investors including institutional players, will explore new ways to expand supply, either by aggregating existing properties or building new ones. One prediction seems certain: The industry will continue to rely on professional collateral review and diligence services to make that search for supply more profitable.

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