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 also offer exit optionality, with the opportunity to sell assets to individual home buyers.
BTRs have an important role to play in the housing economy, meeting an urgent demand for single-family rental housing. It is no wonder investors are flocking to BTRs as a high performing asset.
