Will BTR Rent Growth Outpace Apartment Rent Growth Over Time?
While specific outcomes can vary depending on the market and type of product, generally, the conditions typically support rent growth in the Build-to-Rent (BTR) sector.
Supply: A surplus of apartments intensifies direct competition, which makes it challenging to raise rents. In contrast, BTR supply remains limited, enabling operators to increase rents more swiftly compared to the broader apartment market.
Price: Despite higher BTR rents relative to apartments, the overall costs of homeownership are currently at record highs. Specifically, the costs associated with purchasing entry-level homes are nationally 55% higher than BTR rents.
Tenants: BTR tenants exhibit greater loyalty compared to apartment tenants. Factors such as stable family situations and consistent employment make BTR tenants less sensitive to price changes and less inclined to relocate frequently.
According to John Burns,
BTR’s unique position in a sea of apartments
The relative supply of apartments compared to BTR communities is enormous. Putting upward pressure on apartments’ prices requires more demand than it does for BTR. While recent BTR completions reached an all-time high of 93K in 2023, they remain a fraction of apartment completions (430K).
BTR supply pressures are contained to just a few markets, and most markets still have a relatively small incoming supply. For example, in Indianapolis, approximately 7.5K apartments are under construction compared to 300 BTR units (this does not include planned and prospective units, which include several thousand additional units for apartments and BTR).
Generating demand for 7.5K apartment units compared to 300 BTR units is more difficult. This highlights BTR’s distinct competitive advantage due to the small amount of supply and the appeal to higher-income earners who seek more privacy (and probably have a dog).
The BTR solution: attainable living in a high-cost housing market
For-sale housing costs for entry-level homes are 55% above BTR rents nationally, up from 10% in 2021. For example, in Austin, TX, the average BTR rent is $2,529, while the average monthly payment plus maintenance costs for an entry-level home in the same area is $4,296 (a 70% premium to own).
According to our BTR Tenant Survey (conducted by our New Home Trends Institute), high home prices, high mortgage rates, and high upfront costs are the top 3 factors stopping BTR tenants, who want to be homeowners, from purchasing a home. 73% of BTR tenants would prefer to own their home.
Even if mortgage rates were to drop, increasing home prices and upfront costs for a down payment would continue to drive households to rent in BTR communities.
BTR tenants stay longer: demographics and preferences
BTR tenants typically span different life stages: young singles/couples comprise just over 30% of all tenants, while young families, mature families, and mature singles/couples each make up over 20%. Tenants with children are more reluctant to move because of school considerations. Older tenants are less willing to go through the hassle of moving, making them more likely to stay longer once they move in. Among young singles/couples in BTR, 45% have a household income over $100K. Their higher incomes make them less price-sensitive than apartment renters of the same demographic.
Tenants who rent BTR because they don’t want apartment-style living are more likely to stay until they purchase a home. In contrast, apartment renters are skewed toward young singles and couples, are typically more mobile in life and work, and will often shop around for the best deal every year.
The BTR industry is just getting started. Despite an influx in near-term supply in some markets, demographic growth and cost considerations will drive up BTR rents faster than apartment rents over the long term.
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