After a pandemic pause, the built-for-rent revolution is underway

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Real estate investors are expected to significantly ramp up spending on new homes earmarked for the rental market as built-for-rent housing, a trend that began prior to the pandemic, gets a resurgence following a record quarter.

The built-for-rent trend endured the same shock felt by the real estate industry at large as interest rates soared dramatically last year. But analysts told Inman that interest from institutional investors will lead to a near doubling of the number of new homes built to rent over the next four years, with builders adding 821,000 new rental homes by 2027.

“We expected that the pace of leasing and production of built-for-rent housing would slow down a little bit towards the end of 2022 and early part of 2023,” said Brad Hunter, president of Hunter Housing Economics, which specializes in market research on built-for-rent housing. “Things are improving again.”

Built-for-rent housing involves institutional investors, sometimes backed by some of the biggest banks in the world, scoop up homes by the billions of dollars for the purpose of renting them out. It’s sometimes known as built-to-rent or single-family rentals.

Investors in recent years have found ways to scale their single-family rental portfolios to manage entire neighborhoods of newly built homes as rentals.

Like much of the industry, the built-for-rent market was red-hot during the first few years of COVID since its emergence as a specific real estate asset around 2019, with buyers backed by major investment funds scooping up entire neighborhoods, often hundreds of homes at a time. Experts told Inman Wall Street-backed investors have adjusted to the shock of rate hikes and expect the segment to grow rapidly in the coming years.

“Bult-to-rent is growing,” said Danielle Nguyen, research manager with John Burns Real Estate Consulting. “It’s still a very new asset class.”

Brad Hunter | Hunter Housing Economics

Danielle Nguyen | Vice President of Research at John Burns Research and Consulting

John Burns researchers have identified more than 700 new communities that include at least 25 contiguous single-family detached and attached homes for rent. In total, the firm’s research has identified 131,000 homes to be built, or a 90 percent supply increase, in the coming years.

“As a percentage of total rental home demand in America, BTR is a small fraction that we believe will grow steadily over the coming decades,” the researchers stated.

Record-high share and growing

The total share of homes that are built specifically to rent out rather than sell to homeowners climbed to a record high during the first three months of 2023.

Seven and a half percent of all new single-family homes started in the first quarter of the year were intended to be rentals, according to data from the National Association of Home Builders that likely undercounts the total number. That’s nearly triple the historical share of 2.7 percent.

Still, it marked a slowdown from the rapid growth in number of built-for-rent homes started in 2021 and 2022, according to NAHB data. But the number of new for-sale home starts also dropped 28.1 percent compared to a year ago, and the share of new home starts that will be rentals grew to a new high.

Single-family built-for-rent “has carved out a share of the new construction market,” Robert Dietz, NAHB’s chief economist, told Inman via email. “What had typically been about 3 percent of single-family building is now around 10%.”

John Burns researchers noted independent — or “mom-and-pop” — landlords still represent a majority of those buying single-family homes to rent. But institutional investors are picking back up.

“There are a lot of different players in the space, and institutional single-family rental operators tend to have the larger portfolios,” Nguyen said. “High borrowing rates and rising cost of capital slowed acquisition activity in the latter half of 2022, with operators now starting to slowly acquire homes in 2023.”

Investors target rentals. Builders follow

In 2022, a handful of private equity firms and even some of America’s largest homebuilders announced their plans to increase their presence as landlords.

J.P. Morgan, the biggest bank in the country and one of the biggest in the world, has been moving into the rental market in recent months.

The company announced a joint venture with Haven Realty Capital late last year to buy $1 billion worth of homes.

“Anywhere these can be built, there’s a need for them,” Haven Realty Capital founder Sudha Reddy told the Urban Land Institute.

The companies will target homes in communities across the Sun Belt with 50 to 200 properties ranging between 1,500 square feet and 2,500 square feet. Neither responded to questions from Inman on what progress has been made since the joint venture was announced in November 2022.

But acquisitions like those underway from Haven Realty Capital are common among Wall Street-backed investors in the space. A wave of Chicago-based investors, for example, amassed billions in financing earlier this year for thousands of rental homes, creating pipelines of houses that are still being built.

Lennar, among the biggest homebuilders in the U.S., announced in December it would also partner with investors on 5,000 of its built-for-rent homes.

Pretium Partners, a New York-based hedge fund, last month spent $1.5 billion buying 4,000 homes from America’s largest homebuilder, D.R. Horton, The Wall Street Journal first reported. The homes would be scattered across the Sun Belt on both sides of the country.

Taylor Morrison, another top 10 homebuilder in the U.S., unveiled a new brand of built-for-rent homes late last year. The company didn’t provide a progress update on developing homes under its rental brand name, Yardly. It didn’t provide specific data in its latest earnings report to show how many rental homes it built and how much it earned through rentals.

Growth trends

Rental housing experts said there’s a growing demand for built-for-rent homes among millennials who are more transient and Baby Boomers who may not need or want as much space.

COVID helped to accelerate the trend, and despite a broad slowdown in rental housing, interest in single-family homes and townhouses remains high among renters and struggling homeowners considering a pivot, National Rental Home Council Executive Director David Howard told Inman. 

“We actually have not seen a softening in demand. If anything, demand for BTR remains strong,” Howard said. “The challenge for BTR owners and builders is the cost of financing. As interest rates continue their upward climb it becomes more difficult for developers — of all kinds of housing — to line up financing to make projects feasible.”

John Burns recently released data showing in excess of 3,000 built-to-rent homes under construction across Florida. Another 8,900 have been announced and will be built soon, the firm said.

Nationwide, the number of homes built-for-rent each year is expected to nearly double from 96,000 properties in 2021 to 188,000 by 2027, according to Hunter Housing Economics.

Builders added 353,000 built-for-rent homes in the four years between 2019 and 2022. Over the next four years, they’re expected to add another 633,000.

“I would say with the supply doubling, it’s very, very market specific,” Nguyen said. “If you think about where that supply would be, there’s probably certain markets that are more oversupplied than others in built-to-rent.”

Filling a need, or taking one?

The rise in built-for-rent communities has led some to question whether the trend is sapping chances at home ownership from renters who saw unprecedented growth in both rent and home prices following the onset of the COVID pandemic.

Boyd Campbell | Associate broker at Century 21 New Millennium

High interest rates and prices that have remained largely unchanged continue to keep ownership out of reach for many would-be homebuyers, some real estate professionals told Inman.

“My pain point is we’re replacing the desire in some, the need and even the possibility of homeownership for a large segment of our population,” Boyd Campbell, associate broker with Century 21 New Millennium, told Inman. “It starts with those communities and that demographic that’s most at risk of even affording a house.”

Howard said he expects the share of homes that are built-for-rent to continue to grow in the near-term.

“The important thing to realize here is that BTR and ‘for sale’ housing are not in competition,” he said. “More of both is a win for housing supply, and therefore, homeowners and renters.”

But as long as the share of newly built homes remains higher for rentals than for-sale, Campbell said, it gives buyers less choice.

“Relative to the need for housing, you have different options…buy or lease,” Campbell said. “If you’re leasing you’re still buying, you’re just buying for someone else.”

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