Renters Still Love BTR

Renters will continue to favor single-family build-to-rent homes despite the current economic headwinds as millennials continue to age into such housing and the labor market supports household formation.

That’s according to a recent report from Northmarq, which found that more single-family build-to-rent communities have traded in the first nine months of 2022 than in any full year from 2017-2020, while deliveries of BTR product are expected to increase by 20 percent this year. Construction starts are expected to spike by 25%.

“Elevated mortgage rates will likely support renter demand in the coming quarters,” the report predicts. “Current single-family renters, who may have otherwise transitioned into homeownership in a low- or stable- interest rate environment, will likely remain in the renter pool in the current climate.”

Single-family build-to-rent homes currently account for 6 percent of new home starts, up from 5 percent a few years ago. Markets with the most new projects include Phoenix, Dallas-Fort Worth, Austin, and Atlanta.

And opportunity abounds: “the softer for-sale housing market, particularly for new homes, is expected to allow single-family rental operators to acquire blocks of new homes, finished lots, and larger land parcels from homebuilders,” the report notes. And while the investment market “may require a few more months for buyers and sellers to close the expectations gap on pricing and cap rates, but the underlying fundamentals for the SF BTR class are expected to remain healthy, which will ultimately support property sales.”

BTRs tend to be viewed as more reliable income sources than other asset classes, and large developers are active in the sector. For example, Greystar, the country’s largest apartment developer and manager, now has 3,500 BTR homes in its portfolio spanning 13 states with another 4,300 in the pipeline.

New developments are facing some headwinds, however: in some communities, the narrative that single-family rentals are “crowding out” would-be homeowners is taking root, threatening some development. But “the most likely outcome is that those objections will be overcome and the market will self-correct,” Northmarq analysts predict.

Ultimately, while inflation could restrict demand and higher interest rates could limit investment, single-family build-to-rent housing units in high-growth areas are likely more insulated than most other sectors of the economy, they say.

“Demand for these projects is rising, renters tend to remain in place for longer periods, and transitioning to home ownership is likely to remain challenging,” the report states.