In the past year, while investors have been eager to pour capital into the burgeoning build-to-rent (BTR) single-family residence market, in many cases they are finding plenty of roadblocks to profit. Development sites are harder to find, the price of new construction has soared, and builders are finding that they can make more money selling homes to new buyers rather than disposing of them to BTR entrepreneurs.
Still, the BTR market is growing, particularly in the Sun Belt, panelists agreed at the concurrent session titled “Single-Family Rental, Built to Rent: Institutional Capital Activity and Perspectives.” They also agreed that investors need to dig deep for fresh strategies.
“Last year [2020} and over the summer this year, there was a tremendous land grab for building sites,” said Mathew Avrhami, founder and chief executive officer of Rockridge Properties and Investments in Phoenix. “Now, the no-brainer sites are all gone.”
He added that “there is a substantial number of players since the market has proven out. Now it’s all about focusing on where the next growth tiers will be. It’s a dynamic and moving target, at a point where [investors] are reloading and rebalancing and reassessing how to go forward.”
The industry got its start a decade and more ago, with developers bidding on courthouse steps for portfolios of scattered homesites that had fallen into the hands of lenders. Since then, the big players have been intent on scaling up projects on contiguous sites that are more manageable.
The basic goals are easy to understand. “You need to find a site that is big enough,” said Ashley Casaday, senior director of capital markets at Atlanta-based RangeWater Real Estate. “We’re looking for strong growth markets and short commute times and strong school systems. Then we check on what the nearby rental market looks like.”
As labor and materials have come into short supply lately, homebuilders have increasingly focused on erecting upscale product with plenty of amenities that sells for $300,000 per unit and more. That has given BTR investors an opening. Most BTR housing is positioned at the single-family entry level, giving tenants leaving apartment housing a painless springboard to detached-house living.
In one classic scenario, BTR investors continue to seek out builders who have product ready or nearly ready for sale. But the supply/demand balance has been upended.
Andrew Schaffler, a managing director at global real estate investment firm Angelo Gordon, said that as recently as a year ago his firm counted on going to homebuilders with an offer to take down an entire subdivision with prices per home discounted close to 5 percent. No more. “Today, we pretty much pay the retail price for houses,” Schaffler reported. “It used to be that a builder would give somebody like us a discount because they could count on saving on marketing costs.”
Members can access sessions from the 2021 Fall Meeting on ULI’s Knowledge Finder.
Without the customary discounting on home costs, BTR developers have seen their profits squeezed. Ryan Holgan, executive director at JPMorgan Chase, calculates that cap rates have slipped over the past year from 5.25 percent to around 4.5 percent. “There is so much liquidity in the market that it’s become insanely competitive,” he declared. “There has been a compression in cap rates.”
Andrea Finger, a senior adviser at Whelan Advisory in New York, estimated BTR operating margins at 55 to 65 percent, while noting that investors have lately become quite sophisticated in forecasting the numbers. “It may depend on how the homes are scattered. How many do you own? Can one property management firm service them all?” she said.
The panelists agreed that investors are currently considering BTR sites that would have seemed like longshots years ago. Schaffler said the proliferation of remote warehouses along major highways has been one impetus. Those warehouses need workers, he noted, and those workers in turn need housing nearby.
Finger, asserting that there is “more capital to invest than there is product,” said investors are increasingly being forced to go to second-ring suburbs or instead build townhouses in first-ring suburbs. “You often have to get creative,” she said.
For his part, Holgan said JPMorgan is seeing more opportunities in tertiary communities like Pensacola, Florida. Schaffler put it more bluntly: “Ten years ago, sites 30 or more miles outside Atlanta had investment grades of D or F. You weren’t supposed to go out there. Now, 10 years later, those outer rings are very real.”
Though cap rates are down, Schaffler noted that inflation this year has helped push rents up 15 to 25 percent in many places, though the upward push may be running out of gas. “In the last couple of months, consumers have been pushing back as price escalations moderate,” he said.
There is also evidence that the red-hot for-sale market is cooling off. Earlier in 2021, many builders would not even return phone calls from BTR developers. “But lately we’ve seen builders sending out lists of homes available for sale to us,” Schaffler said.
That is a particularly good sign for the future of BTR, the panelists agreed.
Members can access sessions from the 2021 Fall Meeting on ULI’s Knowledge Finder.
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