Built-To-Rent Market Trends in Denver, CO

Addressing Housing Shortages, Rising Demand, and Investment Opportunities

Build-to-Rent (BTR) developments are residential communities designed to alleviate the U.S. housing shortage by increasing supply. These communities provide the feel of single-family homes but are tailored for renters who seek amenities typically unavailable in multifamily properties. Usually consisting of 50 or more homes or townhomes with no neighbors living above or below, BTR properties are investor-owned, professionally managed, and often feature community amenities and on-site leasing offices. Millennials, facing life milestones such as starting families and buying homes but hindered by student debt, and empty nesters, seeking the financial flexibility and convenience of renting, both drive the demand for larger rental units that meet their needs.

Estimates report that build-to-rent completions have surged over 250% nationally since 2019. According to CoStar analytics, nearly 25,000 BTR homes were completed in 2023, marking a 62% increase over 2022, which represents nearly $7.5 billion in invested dollars. In Denver, there are 632 build-to-rent units planned or under construction per million inhabitants, according to the National Rental Home Council.

Developers Gravitate Towards Built To Rent

Many developers have started to gravitate towards build-to-rent townhomes or single-family communities rather than for sale. It allows them to work away at their development costs and capital costs, taking advantage of the increasing pool of families/households that cannot afford the current for sale product. This product style has been pivotal to driving capital from all over the nation into the Denver market, giving institutional and private client offices the option to sell them off individually when the affordability gap decreases or to continue renting the property out to earn passive income.

Financing construction projects has been very difficult around the country. In Denver, the lending outline is provided below. Financing has been the primary constricting factor in developments across the Denver MSA. However, due to the flexibility, quick lease-up velocity, and insulation to affordability fluctuations, build-to-rents are safe developments for individuals looking to get their shovel in the ground.

Built To Rent Lending Outline | Denver

• Loan Size: 10M-50M
• LTV: 65-70%
• General Rates: 8.85-9.25% | (SOFR + 350bps) Full Term Interest Only
• Non-Recourse

Single-Family Home Shortage & Rising Costs: Implications for Rental Demand in Denver and the West

There is a large shortage of single-family homes in Denver and across the United States. Due to the high interest rates and increasing building costs pushing home prices upwards, a drop-off in single-family builds is taking place. This contradicts the wants and needs of millennials and Generation X who are looking for larger spaces to create families and grow into. The table below shows the dramatic shortage in the West for single-family home rental opportunities.

The interest rates available to first-time homebuyers or the general population have dramatically increased the cost of ownership. Below, the graph represents the cost of ownership, including insurance, landscaping, repairs, and maintenance, all widening the differential with renting. The cost gap will continue to drive renter demand and keep occupancy rates much higher for build-to-rent products.

United States Data/Trends to Support BTR Communities Current Demand & Future Growth

With only 47.2% of workers returning to the office or hybrid work models becoming increasingly common, the demand for build-to-rent communities is surging as they offer the ideal solution for modern living. These communities provide ample space for home offices and multiple workspaces, catering to the needs of remote workers. Concurrently, the affordability of homeownership is rapidly declining, with 61% of renters in major metropolitan areas now priced out of buying a home. This combination of factors is driving demand for BTR properties, which offer a practical and appealing alternative for those seeking more space and flexibility in their living arrangements.

United States Data/Trends to Support BTR Communities Current Demand & Future Growth

Colorado Springs is one of the largest and fastest growing markets in the country when it comes to SFR communities being developed based on existing SFR/BTR stock. They placed 2nd in current construction & 1st in planned construction based off existing stock. Population growth, median income stability, and job opportunities are all factors supporting current and future SFR supply in this market & across the front range.

Headwinds & Opportunities for BTR & SFR

Interest rates have significantly affected the timeline for many planned developments, causing them to remain in the pipeline longer than initially expected. Additionally, potential legislation, including “Just Cause Eviction” laws and other anti-competitive measures, could hinder future growth opportunities for these assets. Moreover, the need to comply with green regulations, which mandate environmental standards for new developments, is further increasing build costs for developers and investors. These factors combined present both challenges and complexities in the current real estate market.
With a surplus of homes that builders are struggling to sell, many are offering significant discounts to landlords. This creates valuable investment opportunities for those seeking properties with a low-value basis that can command top-of-market rents. This trend is particularly notable as there were 13.4% more homes under construction in August 2023, compared to the previous year. Merchant developers eager to offload inventory to recoup capital and fund new projects. In Colorado, where 37.34% of residents work remotely at least one day a week, the demand for homes with dedicated workspaces is rising, further driving interest in single-family rentals and build-to-rent communities. Additionally, with over 80% of renters in the state priced out of homeownership, the need for flexible, high quality rental options continues to grow, making this market segment particularly attractive for investors.