How Build-to-Rent Communities Are Responding to Evolving Housing Demands

The early years of this decade will be remembered for many reasons, not least the global pandemic that triggered a profound reassessment of living situations and locations. This ushered in the era of "The Great American Shift," where individuals and businesses in the U.S. gravitated towards cost-effective locales, often characterized by spacious homes and yards, situated away from dense city centers.

New Era in Housing: Adapting to the Changes

The migration wave of 2020-2022 caused significant inflation in U.S. housing prices. Over the last three years, the median home price has seen an astounding 29% hike due to a surge in demand and various pandemic-related challenges such as disrupted supply chains, labor deficits, and permit delays.

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With the growing home prices compounded by increased mortgage rates, affordability has become a pivotal concern in purchasing decisions. Based on data from John Burns Real Estate Consulting, over two-thirds (67%) of renting households see the lack of down payment as the primary obstacle to homeownership.

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The same study also reveals that 44% of single-family renters with household incomes over $50,000 prefer renting, citing reasons such as increased flexibility and less maintenance and financial responsibilities compared to homeownership.

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The Rise of Build-to-Rent Communities

For those who either choose not to buy or can't afford to, the "build-to-rent" (BTR) trend offers a viable option. BTR communities are designed with the renting demographic in mind, where developers build single-family homes or multi-unit properties specifically for rent instead of selling to individual homeowners.

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These emerging communities cater to a varied tenant mix including millennials, baby boomers, and families, offering an alternative to conventional multifamily apartments or homeownership. Providing shared amenities, uniform quality, and professional management, BTR communities form a bridge between traditional multifamily investing and the single-family rental model.

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Meeting Evolving Renter Preferences

According to Hunter Housing Economics, there will be 132,000 housing starts in BTR communities this year, expected to rise to 188,000 by 2027. Despite a temporary production slowdown due to economic factors, there's projected recovery in the 2024-25 period, aligning with the escalating demand for single-family rentals and a strategic shift among builders towards the BTR model.

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The growing inclination towards single-family home rentals hasn't gone unnoticed by institutional investors like Invitation Homes, Blackstone, and Starwood Capital Group, which have all built substantial portfolios of single-family rentals, synonymously known as BTR. Even prominent homebuilders like Taylor Morrison, Toll Bros., and Lennar have forayed into this emerging market.

The Model's Unique Benefits

Key factors supporting the BTR model over traditional multifamily apartments and scattered-site single-family rental investing include:

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Economies of Scale: BTR communities typically house multiple units within close proximity, allowing investors to economize on maintenance and management costs. This setup also enables developers to streamline processes, cut costs, and boost operational efficiencies.
Uniform Quality: Unlike scattered-site investing, BTR properties offer a consistent quality and design, adding to their appeal for renters.
Community-oriented Living: BTR communities typically offer amenities like parks, playgrounds, fitness centers, and communal spaces, appealing to individuals or families seeking a community-centric living experience.
Strong Capital Flow: BTR communities attract investments from institutional investors, private equity firms, and real estate investment trusts (REITs). Lenders like Fannie Mae, Freddie Mac, FHA, life companies, and banks often treat debt financing for BTR acquisitions on single land parcels similarly to traditional apartment properties.
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The current economic climate has dampened consumer confidence and slowed down household formation. Increased construction costs, regional banking constraints, and persistently high interest rates are likely to impede BTR growth in the short term. However, considering demographic shifts, scalability, housing shortages, and evolving lifestyle preferences, the BTR sector is poised for robust long-term growth.

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