Trend: Build-to-Rent market takes off, as millennials drop out of home ownership

Build-to-rent | LUFT

Emerging asset class

The American Dream is now life, liberty, and the pursuit of rental property.
— LB

Institutional investors, builders, and operators are partnering up to cash in on an emerging asset class called build-to-rent.

After the 2008 recession, investment groups began rolling up distressed inventory (foreclosures) in order to convert them into cash-generating single-family rentals (SFRs).

Now, with prices on existing homes increasing, those same groups are dumping big money into new construction projects for rented upscale homes. This typically involves entire new communities or subdivisions built specifically as rental properties. The scheme works best in markets where land and labor is cheap with more entry-level home building. Fast growing southern and western states mostly.

Build-to-rent is considered an emerging asset class treated like multifamily or data centers. Large home builders like the Toll Brothers and Lennar are pumping significant sums into the SFR market. Last summer, Tricon American Homes announced a $750 million joint venture with the Teacher Retirement System and a Singapore investor to acquire and manage a portfolio of rental homes together.

Traditionally, new home builders would look at demand from individual buyers when assessing new projects. As home prices have gone up, young families are more likely to rent. Single-family rentals account for sixteen percent of the U.S. single-family market, according to New York investment group GTIS partners.

The term “build to rent” originated in the U.K. a few years back. Definition from Wikipedia:

“Build to Rent (B2R) refers to the emerging sub-market in private rented residential stock in the United Kingdom, designed specifically for renting rather than for sale, typically owned by institutional investors and managed by specialist operators. The product is in many ways synonymous with the multi-family sector in the United States.”

Now the same concept applies to single-family developments in the U.S.

How we got here

More recent economic data from Zillow Group further supports some of underlying market dynamics driving the trend i.e. rising home prices coupled with declining home sales.

Source: Zillow Economic Data; LUFT calculations

Source: Zillow Economic Data; LUFT calculations

The median price of a single-family home increased 30 percent from June 2015 to June 2019. Meanwhile, June home sales dropped year-over-year for the first time in five years (see figure).

More price sensitive lower-to-middle income buyers are filtering out of home buying. The 30-year mortgage starts to make less sense as an investment decision for individuals and families that neither want to or can afford to buy a home.

Another draw for investors is that operating costs on new homes are lower, as fewer elements need repair and replacing. Contractor warranties also cover investors and help secure higher overall returns.

Rental Economy

Home ownership has been part of U.S culture for generations. Renting single-family homes had been the exception rather than the rule, especially for middle to middle-high income earners. The more recent B2R trend highlights the further expansion of the sharing or rental economy into new segments. It also signals continued consolidation in real estate and a shift in investor mindset towards emerging asset classes, born out of the digital age and an influx of institutional capital into real estate.

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