The 8th Annual Build-to-Rent (BTR), Land & Homebuilding Forum in Nashville was stormy for more than just the weather conditions that caused massive delays on our trip home. Here are some key takeaways from the event that attracted investors and operators of single-family rental (SFR scattered) and build-to-rent (BTR contiguous) homes.
- Most people are on the sidelines. Virtually everyone we spoke with recognized that the market has shifted.
- Q4 saw less leasing traffic and moderating rent growth.
- Q1 2023 has seen improved demand and rent growth similar to the performance of the for-sale housing market. This has created optimism.
- Rent matters more than amenities: Tenant preferences for high-cost amenities need to be justified by local market research. Developers from the apartment industry struggle with this. The SFR/BTR amenity differentiator is a yard and a garage.
- SFR and BTR benefit from home buying challenges: The residential rental space benefits from the for-sale affordability challenges and an increased desire to leave an apartment for a more pet-friendly, lower-density rental where it is easier to work from home. SFR homes offer more bedrooms, privacy, and backyards; BTR offers on-site leasing and maintenance to alleviate the headache of fixing maintenance within a home.
- High borrowing rates have slowed investment, but optimism remains: There is cautious optimism in the market that rates will come down, as forecast in the bond market, and home prices will fall, which has clearly been happening with new homes. This combination, along with today’s strong wage growth, will allow the SFR and BTR businesses to kick back up.
Pause Button Is On as Seasonality Claws Its Way Back
After a two-year hiatus, seasonality is back—starting in mid-2022.
- Rents began falling late summer into December 2022, in the increasingly difficult macroeconomic backdrop (economic uncertainty and high inflation), which hinders the ability and willingness for consumers to pay more for rent.
- The rising cost of capital paused a tremendous amount of deals and acquisitions, hindering portfolio growth for the operators.
- However, on the operational front, rent and occupancy trends remained high in most markets as operators focused on keeping their homes occupied in the seasonally slower parts of the year.
Early 2023 rental strength (improving lease-up rates, rent growth, demand, traffic) is similar to the positive performance seen in the for-sale housing market.
Balancing Amenities to Maximize Yield
Consider tenant preferences, geography, demographics, and whether high-cost amenities can be justified to charge more in rent to boost rental yield.
Rent matters more than amenities, as one to two apartment-like amenities is plenty for BTR communities.
- Homeowners will usually pay a higher premium for more amenities, a larger house, and more space compared to renters.
- Adding too many other amenities will usually result in diminishing returns.
A significant consensus on amenities for any BTR product include:
- An individual home (not stacked)
- Pet friendly
This is a big sell for those graduating from multifamily housing and those downsizing. Operators should consider their market, product type, unit count, and tenant profile to understand best which amenities to provide for the greatest ROI.
SFR and BTR Industry Benefits from Home-Buying Challenges
Affordability: Worsening for-sale affordability (high mortgage rates and home prices) may push buyers to the sidelines as they can no longer afford to purchase a home.
Flexibility and space:
- Desire for lower-density rental (and not getting locked in a 30-year mortgage) continues to allow flexibility for tenants, as many are renters by choice.
- As aging millennials are now in family formation years, the need for more bedrooms, privacy, a backyard, and pet-friendly landlords may spur demand for SFR/BTR homes that a renter cannot find in a multifamily apartment.
Value: On-site leasing and maintenance alleviate the headache of fixing maintenance issues within your own home.
- Superior property management and amenity offerings are a great alternative to more densely populated apartments with common hallways and elevators.
Cautious Optimism Heading Into 2023
The rising cost of capital hurt deal flows: few deals took place between mid- to late-2022 as the cost of capital got more challenging to underwrite deals, despite all the capital we saw flow into the asset class in recent years.
There is cautious optimism on the long-term fundamentals for the SFR/BTR market.
- Rates will come down (eventually), as forecasted in the bond market.
- Home prices are falling from peak (both new and resale). Lower home prices (and lower construction costs) will allow for operators to acquire or build more homes, helping grow their portfolios.
- Worsening for-sale affordability is keeping renters in place.
- Demographic tailwinds, suburban migration, and work-from-home boosts demand for SFR and BTR housing.
Our consulting team has been busy across the country helping clients evaluate new BTR communities and SFR markets to expand to every day—in markets you would expect and many you might not.
Our research team continues to keep our clients up to date with thoughtful insight on where the market is headed with our housing and economic forecasts on both the for-sale and for-rent markets.