BTR Construction Enters a Temporary Stall

Build-to-rent housing became a very bright spot in the new home market as interest rates rose, for-sale inventory shrank, boomers looked to get out of owning and bank equity and those relocating waited to buy until they were more settled. Now, according to Northmarq, construction starts are declining at the same time economic uncertainty clouds the horizon and new household formation slows. But the big question is how long will this latest wrinkle last? 

The BTR market is not a copy-cat of the for-sale single-family housing market where starts declined dramatically in 2022’s second half. Builders in the BTR niche recognized an opportunity to construct houses for those who like the idea of a private yard, more square footage than most apartments and the potential camaraderie from being in a neighborhood with other homes.

At the same time, the health of BTR housing is not black and white but more nuanced with ups and downs predicted. Last year 2002’s construction starts were very strong at 76,000 units, up more than 25% from the prior year. Starts increased during the middle of that year and slowed a bit in the fourth quarter. Altogether, completions totaled about 65,000 units, up more than 20% from 2021’s total.

What’s Ahead This Year

This year is expected to bring a strong round of completions due to the prior starts with projects totaling 70,000 units, a high and even more than last year. Yet, starts are expected to slow, but only be a temporary stall, according to experts. Deliveries are uneven due to delays in supply chains that have occurred and the availability of less capital that will keep down new projects in the short term. As proof they point to starts in the first quarter, which declined 36% from 2022’s peak. But longer term the pundits see the segment as healthy and moving forward.

Regional Developments 

New developments are healthiest in areas with strong in-migration and job growth and where land sites can be entitled within what’s termed a “reasonable” period.

Starts. Many starts occur in the Sun Belt and construction in the South rose by 19% last year to total about 43,000 units. Particularly strong markets are in Dallas-Fort Worth, Tampa, Orlando and Jacksonville because of in-migration, corporate relocations and increased housing costs, which make the BTR an appealing alternative to renters and hence developers.

The Midwest saw growth too with starts doubling from 2021 to 2022 and hitting 14,000 units. The majority of its activity has been in Indianapolis, Columbus, Minneapolis and Kansas City.

Completions.  Starts were healthy last year but deliveries didn’t reflect the same acceleration. Projects that became available in the South totaled 40,000 units, a 56% increase from 2021 levels. Out West, deliveries rose 30% in 2022 to number 13,000 units which represented the fifth year for total units above 10,000. In the Midwest, deliveries declined by almost 20% and went below 10,000 to 9,000 units. But because of a step-up in new unit starts, deliveries should pick up in the coming years. 

Winning Areas

Units under construction will lead to a variety of markets seeing more development but all of the top 10 are in the “Smile States”, with Phoenix at the top, followed by Dallas-Fort Worth, Houston, Orlando, Atlanta, Jacksonville, Charlotte, Tampa/Sarasota, Austin and Nashville.