Built-To-Rent (BTR) & Single-Family-Rentals (SFR)

The emergence of build-to-rent (BTR) and single-family rental (SFR) housing gained momentum primarily after the Great Financial Crisis. Significant players in the real estate market began acquiring predominately unoccupied single-family homes for rental purposes. This action brought stability to local housing markets, fostered economic growth, and generated several employment opportunities. Now, with the 30-year fixed mortgage rate high, it is pushing consumers back to renting. As “would-be” homeowners look for an alternative, SFR and BTR communities are gaining popularity. They offer the feeling of a home without inflated mortgage payments.

 

As institutional capital continues to pour into this developing asset class at an all-time high, it is critical to review the macro drivers to comprehend its expanding appeal. From a renter’s perspective, SFR and BTR properties offer a more favorable style of living, especially for millennials and baby boomers. Many millennials have become renters by choice, while baby boomers have come to enjoy the flexibility these property types bring them. From an investor’s perspective, SFR and BTR properties offer a current low institutional exposure (as of now) and strong operational fundamentals.

 

SFR CMBS issuance has totaled $4.2 billion through the first half of 2024 — 143% more than the output from the second half of 2023 ($1.7 billion)

 

What Is Driving Demand?

Given the state of the economy and the housing market, several factors contribute to the growing demand for SFRs and BTR communities.

 

• Evolving Lifestyle Preferences: Unlike previous generations, millennials have become more so renters by choice.
• Financial Concerns: Today’s economy has made it more challenging to purchase a home.
• Need for Flexibility: Gen X’ers prefer a commitment-free lifestyle, whereas Baby Boomers prefer a less hands-on/demanding lifestyle.
• High-end Amenities: SFR/BTR Communities can offer the same amenities as Class-A, Garden Style communities, making them more desirable to the consumer.
• Shifting Migration Patterns: Due to affordability concerns, many people have migrated to more cost-friendly states.
• Housing Shortage: The nation is short over 3.5 million units.

 

Even during recessions SFR rents have remained positive, whereas multifamily rents experienced a decline. For example, in 2023, multifamily rent growth nationally decelerated below 2%, while SFR rents grew by 3.3%.

 

BTR vs. SFR

BTR properties and SFRs are lucrative opportunities for investors seeking passive income in commercial real estate. SFRs are a mixture of new construction and existing single-family homes that are either built or rehabbed and then leased out to tenants. Typically, these communities are all detached homes. BTRs are purpose-built rental communities that are typically attached. Examples are HPR townhome communities, where there are several buildings with 3+ bedrooms throughout the community.

 

The most rapidly expanding sector within the U.S. housing market is the SFR market. Contributing to the U.S. housing inventory expansion, these communities typically consist of 50 or more attached and detached single-family homes and townhomes. Meticulously crafted to appeal to today’s discerning renters who desire the comforts of a new home coupled with professional property management, BTR communities are often seen as an extension of traditional apartments. The distinguishing features of BTR properties include the absence of neighbors living above or below the renter, upscale finishes in the homes, and amenities such as backyards, garages, pools, fitness centers, coffee lounges, dog parks, and more.

 

SFRs and BTR communities provide the maintenance free conveniences of apartment living while staying away from the escalating expenses associated with homeownership. These advantages become increasingly attractive in the current environment of rising interest rates and diminished household spending power.

 

The SFR and BTR asset classes have demonstrated remarkable returns and positive fundamentals, capturing the attention of investors nationwide. All signs point to this asset class being a thriving industry with ample room for further expansion.

 

Key Characteristics

BTR

Institutional Property Management: BTR properties have professional property management overseeing the community and will have on-site leasing the majority of the time. Moreover, these services boast a team of skilled professionals dedicated to repair and maintenance tasks, ensuring that the properties under management are well-maintained and promptly addressed in case of any issues. The operators handle the entire neighborhood’s leasing, landscaping, repairs, and operations.

 

Property Features: BTR residences provide privacy because no other inhabitants are above or below. Building materials like high-quality imitation wood flooring and granite countertops are often long lasting and low-maintenance. Compared to standard multifamily, unit sizes differ significantly. Most apartments offer dedicated outdoor areas, including a front yard, backyard, and/or patio space.

 

Location: BTR properties are usually situated in less dense suburban or exurban locations within an hour’s commute from urban centers. These properties can be part of a master-planned community and offer relatively easy access to retail and transportation arteries.

 

Age: BTR properties are an emerging asset class, with the majority being new construction. Depending on the location, they can be homebuilder conversions from for sale to rental.

 

SFR

More Privacy: As individual residences, single-family homes typically occupy their own private lots, devoid of shared walls. The impact of noise is considerably diminished in such settings, given the absence of neighboring residences sharing walls that could transmit sounds. Because the properties are detached, the first-floor ceilings are typically nine feet high, with windows potentially on all walls. Due to double-loaded corridors, apartment ceilings are frequently eight feet high, with windows on only one wall.

 

Location: Most SFRs are in residential neighborhoods, offering tenants a genuine community experience. In addition to the residential aspect, their location also allows them to be bigger than multifamily dwellings. They usually have more storage space, including exterior storage like a shed or a garage.

 

Higher Rent: They can command higher rents than regular apartment units due to the additional room and amenities.

 

Customization: Tenants in SFRs often have more freedom to customize and personalize their living spaces, such as painting walls or making other interior modifications, subject to the terms of the lease agreement.

 

BTR & SFR

Lower Turnover: The BTR/SFR product line instills the psychological notion of “home ownership” without actually owning the property. With that, most tenants take pride in their space, and tend to stay longer than your transitory apartment renter; thus, turnover expenses are typically less than your traditional apartment complex.

 

Market Overview

Arizona is the nation’s leader in BTR construction.

 

The BTR asset class is becoming a more appealing investment option, especially in Arizona. This asset class has demonstrated exceptional market and operational fundamentals while meeting the need for single-family homes. According to Rent Café, Phoenix, Dallas, and Detroit have added the most SFR in the last five years. Axios has also released data stating that more than 1,000 BTR homes are planned or under construction per million North Carolina residents. The nationwide average is only 345. As of Q4 2023, there are over 113,000 BTR properties under construction, according to RealPage Market Analytics.

 

The Sunbelt remains the clear leader, with approximately 66,500 units under construction in the South (nearly 41%) and another 29,800 units under construction in the West (roughly 26%). Meanwhile, the Midwest (14,484 units, or nearly 13%) and Northeast (2,441 units, or 2%) account for less than a fifth of the total BTR units under construction.

 

As for SFRs, this asset class is projected to continue thriving even in this period of economic uncertainty. According to RentCafe, Myrtle Beach, SC, is one of the top trending metros for SFRs. All of the units in this market were constructed over the last five years, with more than half completed in 2022. SFR rents are likely to surpass both home prices and apartment rent growth. These fundamentals have piqued the curiosity of many institutional investors. Dallas, TX, ranks at the top of the list with more than 2,770 SFRs completed in 2022 alone.

 

Investment Strategies

SFR and BTR properties continue to display robust and resilient fundamentals compared to other commercial real estate asset classes. Despite being in the early phases of widespread adoption, numerous investors and developers are recognizing its viability in markets where it is not yet present. While large institutional investors traditionally constituted 3% of the market, expectations are that this market share will double by 2025. Furthermore, institutional capital is anticipated to comprise most of the capital invested in this asset class by 2030. Over the past decade, a select few pioneers held most of the institutional market share in the SFR and BTR asset categories.

 

Developers such as Invitation Homes, AMH (American Homes 4 Rent), and Progress Residential played vital roles as early adopters. New investors are now entering the market with substantial capital due to favorable returns and increasing demand.

 

Debt & Equity

The pool of active capital sources in the SFR and BTR asset categories has experienced a significant surge. Solid fundamentals and attractive returns
have drawn liquidity from developers, operators, and lenders alike. There is a heightened demand for construction, acquisition, and equity financing across the sector.

 

Construction Financing

• The demand for construction financing for SFR/BTR developments is expected to persist in the projected future. Despite the impact of rising interest rates on new development financing, the demand for funding remains steadfast.
• Banks are the primary source of construction financing, with balance sheet lenders actively participating. Fannie Mae and Freddie Mac provide take-out financing for build-to-rent developments. However the success of Government Sponsored Enterprises (GSE) financing hinges on the quality of assets and superior underwriting fundamentals.

 

Acquisition Financing

• Government-sponsored entities, life companies, and banks increasingly provide financing for acquiring assets in this category.
• Fannie Mae and Freddie Mac emerged as the primary sources of acquisition financing for BTR communities. The underwriting process mirrors that of new Class A apartment properties.

 

Equity Funding

• In 2021, capital flowed abundantly into the asset class through joint ventures and private equity. The asset class’s superior returns compared to other classes have led capital to patiently await favorable conditions for investment.

 

Looking Ahead:

Forbes anticipates a gradual increase in construction activity over the next five years. This trend is also in harmony with the changing preferences of the 83 million members of the millennial generation, who are transitioning away from apartment living. In addition, as more millennials begin to have children and search for home ownership alternatives, BTR properties and SFRs will continue to grow in demand.