Even in the midst of the broader troubled commercial real estate market, the single-family rental (SFR) sector has continued to expand driven by a surge of build-to-rent (BTR) projects which have set new records in the deliveries of new homes.
While the SFR sector was built first through acquisition, real estate investment managers in the space have not been able to keep pace with rental demand by buying alone and increasingly have turned to building BTR communities from the ground up. That has led to the creation of firms and funds that focus on BTR projects, which have been bolstered by investor interest in the segment.
Last year, 14,541 new BTR homes were delivered countrywide, the highest annual total to date and a 47% increase from 2021, when 10,000 new BTR units were completed, according to RentCafe, an apartment listing service that is part of Yardi Systems. BTRs also accounted for 6.9% of all single-family construction starts in 2022, a new record for the product, according to Census Bureau data analyzed by Arbor, a REIT focused on multifamily lending. By unit count the starts totaled 69,000, a 32.7% year-over-year increase.
In contrast, from 1975 to 2007, BTR homes accounted for just under 2.0 percent of all single-family construction starts in the U.S. on average, with only about 6,000 units completed annually.
That momentum has carried over into 2023. In March 2023, there were nearly 44,700 new BTR units under construction, according to research firm Integra Realty Resources (IRR)—triple the number of those completed in 2022. But with an occupancy rate of 97%, slightly above the 95% occupancy rate for multifamily units, the outlook for the BTR sector continues to look bright, according to RentCafé.
Executives at Blue Vista Capital Partners, a private equity general partner firm based in Chicago, tend to agree with that assessment. Investing in SFRs and BTR projects is part of the firm’s middle-market real estate strategy, said Blue Vista principal Matthew Schoaf. Blue Vista recently partnered with Belleair Development and Mize & Sefair Development to make its sixth BTR community acquisition since 2020 with the Keys at Wildwood, a 190-unit BTR development on 19 acres of land in Oxford, Fla. “We have consistently deployed capital in the BTR sector, with a primary focus on developing new BTR communities in growth markets across the Southwest’s and Southeast’s primary and secondary markets,” said Schoaf. Blue Vista's middle market equity platform includes a mix of closed and open-end real estate funds as well as joint ventures. It focuses on properties between $10 and $75 million in size.
Blue Vista is investing in build-to-rent communities featuring both single-story cottages and townhouses. Both product types appeal to potential renters and have demonstrated extremely healthy property fundamentals “when executed right,” Schoaf noted. BTRs tend to have faster lease-up, absorption at higher rents than traditional multifamily product and stickier tenancy—i.e., less turnover, which has an impact on consistent cash flow production.
Blue Vista’s equity investors include pension funds, insurance companies, endowments and foundations, sovereign wealth funds and family offices. “BTR communities have significant appeal to institutional real estate investors and fund managers, both public and private,” said Schoaf. “The investment sales activity for BTR communities remains robust and active, despite a higher interest-rate environment.”
Schoaf does expect BTR activity to “taper down” in the coming years for a number of reasons, including economic conditions and the supply/demand balance in the sector. “However, the consumer has repeatedly proven to want/elect/choose to live in these communities, which provides long-term stability for the BTR asset class,” he noted.
Founded in 2012, Phoenix-based development firm NexMetro Communities has already invested more than $2.3 billion in BTR communities around the nation and plans to continue expanding, according to Jacque Petroulakis, the company’s executive vice president of marketing and investor relations. The firm’s portfolio includes more than 54 BTR communities featuring over 9,000 homes that have been completed, are in development or are under construction. Marketed under the name Avilla Homes, NexMetro’s class-A BTR units are being built in the submarkets of large, growing metros throughout the Sunbelt, “near employments, freeways and other demand drivers,” said Petroulakis.
“NexMetro conducts considerable demographic and demand analysis to determine the best metro areas and submarkets in which to build single-family rentals. We are not a growth for growth’s sake company—we are very strategic and continue to see increasing demand,” she noted.
Although Petroulakis acknowledged that NexMetro had to increase its overall project budgeting in recent months due to rising prices “from cost of land to construction and labor” combined with more expensive financing from rising interest rates, the firm’s executives have taken current market challenges as an opportunity to identify the most in-demand neighborhood locations for BTR development, she noted.
The firm views the single-family rental sector as a “hybrid” that will remain in favor because it appeals to “a diverse group of renters by choice,” Petroulakis said.
NexMetro’s equity investors include primarily high-net-worth (HNW) individuals and family offices. Its average internal rate of return to date has been 24%.
“Most of our investors are programmatic, meaning they invest in multiple projects because we use consistent assumptions and are highly focused on operational efficiency,” Petroulakis noted. “The continued demand and popularity of BTR is also in our investors’ favor as the offering has gained wide appeal among multifamily developers, single-family homebuilders, institutional capital and private investors.… The appeal of a lower-density housing community with single-family-like design features is especially important in an era where a high percentage of households cannot move into homeownership because of high for-sale housing costs.”
NexMetro sees “a lot of runway” left for BTR development and plans to continue in the sector for the foreseeable future, she added. “This is a lifestyle choice, not a trend,” she noted. “People want freedom, privacy and flexibility today more than ever before.”
Overall, about 44 million Americans live in single-family rentals according to iProperty Management. The sector got a big boost from pandemic-related changes, when people were forced to work from home and began to “prioritize living and workspace quality,” IRR researchers wrote. Meanwhile, higher prices and low inventory in the for-sale housing market created greater competition among homebuyers. More recently, rising interest rates have also kept many first-time homebuyers from purchasing a home.
Besides appealing to out-priced millennials, single-family rental housing also tends to attract retirees wishing to downsize or relocate closer to other family members and appeals to people making lifestyle transitions, perhaps due to divorce, health or career changes.
According to research by RentCafé, the top metros for the current wave of BTR construction include: Phoenix (with almost 5,500 units under construction); Dallas (4,400 units); Houston (2,600 units); Atlanta (nearly 2,200 units); Charlotte, N.C., (1,700 units); Tampa, Fla., (1,400 units); Jacksonville, Fla., (1,300 units) and Nashville, Tenn. (1,100 units). Salt Lake City, San Antonio, Texas, and Austin, Texas, round out the top 10 list.
SFR stock is being boosted in several metros for varying reasons. For instance, Orlando, Fla., which has become one of the most competitive markets in the country for apartment renters, is seeing more BTR units because that will address its housing shortage. Other cities with developing tech hubs, like Salt Lake City, Charlotte and Detroit, are adding to their BTR stock in anticipation of new workers relocating. Detroit saw a stunning 96% rise in units in 2022—adding 2,200 to bring the total number of its BTR units to 4,600—and is set to continue boosting its BTR stock to meet increasing housing demand from workers at the tech companies opening facilities there, as well as those at the future Detroit Center of Innovation.
Development firm Curve Development was founded in Phoenix in 2019 specifically to pursue BTR projects, said president and owner Nate Pile. Curve’s largest BTR community so far is the 306-unit Cyrene at Painted Tree in the Dallas suburb of McKinney. Last February, the developer began pre-leasing its 11th development, Cyrene at Meadowlands, an 81-unit community in Lincoln, Calif., near Sacramento. Meanwhile, renters are beginning to move into Curve’s recently completed Cyrene at MiraBay, in Tampa, an 82-unit community. For Pile, there is no reason for Curve to slow down yet on BTR projects.
“I would say we will stay on a similar trajectory, continuing to do BTR, but we are a well-rounded company with experience everywhere,” he notes (in addition to BTR, Curve works on multifamily and commercial projects). “Our investors [New York City-based JEN Partners] have been pretty enthusiastic. What’s unique is the way [BTR] benefits both us and them—they’re primarily a land development, private equity firm, so they have thousands of lots across the country, finished or raw. They own land in 12 or 14 states and have regional land partners that help develop those parcels. It’s been a very systematic way for us to grow nationally and utilize a business platform that they already have teed up.”
Curve is backed by JEN Partners, a residential real estate firm with experience in the residential land, homebuilding, and workforce housing arenas. JEN and its principals have invested more than $6 billion in residential land and backed eight homebuilding companies representing over $1 billion in value. JEN is currently investing its eighth fund and has successfully realized a separate account for a large state pension fund.
Once Curve and its investment partners complete and stabilize a new BTR community, they can exit the investment by selling it. The current cap rate on stabilized BTR communities quoted by interested investors averages between 5.0 and 5.5%, Pile said. Arbor researchers estimated the average cap rate on sales of SFR communities in general at 5.9% in the first quarter of 2023—a increase of 40 basis points over the fourth quarter of 2022. But in February, valuations in the sector started stabilizing and even increasing, Arbor reported.
Last October, Curve sold Cyrene at South Mountain, a 72-home community in Phoenix, for $35.44 million, or $492,222 per home—reportedly a record price for the area. The transaction marked the first time Curve sold a completed development.
In Pile’s view, the SFR sector will continue to gain momentum “because it hits all the demographics.” For example, the affordable housing shortage means people will continue to see BTR as an alternative to buying a home. “I firmly believe BTR is going to continue to grow,” he said. “It will shape itself a little differently than it is today because more typical home builders are getting into the game.”