by Scott Herr and Callum Parrott
One of the big stories in the real estate industry in recent years has been the emergence of the single-family rental market as an appealing destination for investors’ dollars.
According to Berkadia, the construction of build-to-rent homes – single-family houses built for the purpose of renting out – jumped by 30% from 2019 to 2020. A 2022 report by the company also notes that “developers expect build-to-rent homes will reach a double-digit share of new construction by 2024, compared to its 6% share of new homes being built in the U.S. today. SFR is the fastest-growing sector of the housing market.”
For years, the SFR market has been dominated by mom-and-pop operators, but institutional players and large multifamily companies have observed the vast demand that exists for this product and have entered the sector in recent years. Mill Creek and others are developing entire BTR communities, which can feature hundreds of single-family homes while also providing residents with a multifamily-like array of amenities, such as swimming pools, fitness centers, playgrounds, dog parks and maintenance services.
Looking ahead, those interested in this growing market might wonder what makes a submarket a good one for a BTR community, and which regions of the country might see these developments arise and flourish in the years to come.
Growth, Jobs and Schools
Many of the factors that make an area a good fit for a BTR community are largely intuitive. Residents in these developments want access to good school districts, quality retail and thriving job centers. For developers and investors, they want to see population and job growth in the surrounding area.
At Mill Creek, we want our BTR communities to be within 30 minutes of a major employment hub and minutes away from major grocery stores. Walkability and Walk Scores, which have become such important factors for apartment residents, are not important to SFR renters. For the most part, they are going to drive.
Unfortunately, there are jurisdictions that aren’t especially enthusiastic about SFR properties and BTR developments. These local governments may restrict the number or percentage of single-family homes that can be for rent, or they may prohibit single-family rentals altogether. Or they might try to make BTR development almost prohibitively expensive through architectural restrictions. Obviously, these are areas that investors and developers are likely to pass upon.
Considering the above factors, Mill Creek is targeting the Atlanta, Phoenix and Nashville metros for BTR projects, as well as markets throughout the Carolinas, Texas and north Florida. Berkadia has identified Utah, Nevada and Idaho as other states that are likely to be attractive to SFR/BTR developers.
Words of Wisdom
When building a single-family team to evaluate opportunities and develop BTR communities, it’s important that longtime multifamily players make sure they bring in people with ample SFR experience. Although there are some surface similarities, the multifamily and BTR landscapes are profoundly different overall.
It’s not easy to find suitable development sites, and developers need team members who know the major land sellers in the space, as well as the capital needs and providers. You also need team members who understand the BTR community construction process and how to maximize efficiencies in that process. If you asked a longtime SFR player to build a high-rise apartment building in a downtown area, they would be lost. The same is often true for apartment companies entering the BTR space without the right in-house experience and expertise.
Looking ahead, it’s clear that BTR communities will play a major role in the rental housing world in the coming years and decades. Renters want them and in those areas with the right market and economic factors in place, developers can build a product that will experience high occupancy rates and deliver the targeted returns to investors.