A hedge against real estate cycles
By PATRICK DUFFY
In September of 2015, I wrote a column about the introduction of a new product type to the home building marketplace: the single-family home for rent, otherwise known as build-to-rent (B2R). At that time, just a few builders, including Lennar and Toll Brothers, had dipped their toes into these waters, but today it’s being seen as a clever hedge against the boom-and-bust real estate cycles which can test even the best-run companies.
To be sure, it’s not just homebuilders getting into this game. Wall Street-backed companies like Invitation Homes and AmericanHomes- 4Rent started the trend by buying up cheap, existing single-family homes in foreclosure back in 2012 when home prices were near their lowest, eventually assembling a portfolio of 200,000 units across the country. Even with that rapid growth, their holdings still represent just 1.4 percent of the estimated 14 million single-family rental homes, with most owned by small “mom and pop” operators.
Today, with this business throwing off stable cash flow and maintaining low vacancy rates, more builders are entering this space, with some focused entirely on the B2R model. According to a recent NAHB analysis of Census Bureau data, during the 12 months ending with the first quarter of 2018, there were 37,000 single-family homes started for rent, up from 33,000 during the previous four quarters. Of this total, 7,000 were started in the first quarter alone. While that annual market share of 4.3 percent is down from the 5.8 percent share of five years ago, it’s still significantly higher than the 2.7 percent average noted during the prior 20-year period of 1992-2012.
Not surprisingly, builders of new single-family homes for rent also enjoy some significant advantages over the typical corporate model of offering only existing homes. These benefits include fewer maintenance issues associated with newly built units, the ability to standardize features and amenities across a portfolio (and charge premiums for upgrades), and the higher management efficiencies that come with concentrating multiple units in the same location. Indeed, one of the most common complaints cited by tenants of these corporate rental home behemoths is that their widely dispersed maintenance operations depend on local contractors, often resulting in long delays, even for essential issues.
Like builders of homes for sale, rental homebuilders also have divided product lines by quality of amenities and services. In some cases, such as when a builder of both rental and for-sale homes include the two options scattered across the same neighborhood, community amenities might be more basic and without on-site management.
In other cases, such as in a neighborhood of only homes for rent, the leasing experience might be similar to that of a traditional for-sale community, with several model homes from which to choose, full-time leasing agents, and on-site maintenance and gardening services. For those renters wanting to experience the benefits of a resort-style apartment community in a single-family home (and willing to pay more), community amenities could also include pool and spa areas, parks, and gated entrances.
While it’s not easy to quantify the exact depth of demand for single-family rentals, a combination of economic and demographic factors do provide some considerable tailwinds for the foreseeable future. On the economic side, high levels of student loan debt and the challenges of saving for a down payment versus a tight job market mean more young families are willing to test-drive living in single-family neighborhoods. According to the American Community Survey, 56 percent of gains in the nation’s rental housing stock between 2005 and 2015 were for single-family homes, while the number of households living in all rental properties grew from 33 to 36 percent, or more than an additional 544,000 per year.
On the demographic side, Millennials are now increasingly reaching milestones delayed by the Great Recession, with more moving back to the suburbs they once avoided. While this is partly due to bedroom count limitations in most apartments, it’s also due to changing lifestyle preferences. In many cases, although many younger renters in their 30s have sufficient incomes to quality for mortgages, the ability to live in a single-family home without the commitment of a purchase is steadily gaining popularity.
Joining these younger renters are baby boomers looking to downsize, not necessarily in space but in the financial commitment required. By renting the same type of single-family home product they once owned, they not only avoid spending their retirement savings in a down payment, but they can also enjoy the freedom associated with a more transient lifestyle. That’s a hedge from which both builders and renters can benefit.
Patrick Duffy is a Principal with MetroIntelligence Real Estate Advisors and contributes to BuilderBytes. He may be reached at firstname.lastname@example.org or at 310-666-8288.