As high prices and higher mortgage rates slow the for-sale market, demand for rental opportunities, including in the build-to-rent (BTR) space, have continued to emerge. BTR products, including purpose-built single-family rentals and horizontal apartments, have matured and become more nuanced to appeal to prospective renters.
With affordability remaining a concern in the single-family for-sale market, consumers across many age cohorts, including millennials and baby-chasing boomers, are turning to the BTR market either by choice or financial necessity, as renting remains a cheaper option than owning in many markets across the country.
At Zonda’s The Future of Build to Rent in Dallas on March 27 and 28, panelists will explore what 2023 holds for the BTR space, providing attendees supply and demand forecasts, market updates, and potential headwinds. Additional sessions will highlight land and capitalizing on deals, product evolution in the space, and technology solutions.
Ahead of the conference, BUILDER spoke with Zonda senior managing principal Tim Sullivan for an update on how 2023 has looked so far for the BTR space, what is expected throughout the year, and factors to keep an eye on in the short- and long-term future of the market segment.
BUILDER: What is the state of the BTR market, and what are the expectations for the market in 2023?
Sullivan: [The market] slowed significantly in the latter months of 2022 as capital providers pulled back to see how interest rates and the housing market would evolve. There are some entrepreneurial groups that are acquiring sites, but mostly the space is being very cautious.
With the increase in interest rates, it’s expanded cap rates. So there really aren’t any sellers right now. That’s going to change, and one of the things we’re going to talk about at the conference is what it will take to unfreeze the market, unfreeze the capital markets, so we see transactions again.
Right now, the space is frozen because the capital markets are frozen. That won’t hold. But the question is how long will it hold? The [catalyst] from here that will make the market come back to life will be the Fed lightening up on the Federal Funds Rate, the mortgage markets pulling back, and the capital requirements of capital providers softening. There’s a pretty significant cost disadvantage right now.
BUILDER: What is the timeline for the market to unfreeze, and what will be the catalyst for a return in activity?
Sullivan: I am hopeful that toward the latter part of this year, the second half of this year, we see the markets become unstuck.
It’s going to be a reduction in costs [that is the catalyst]. Very specifically, the cost of capital. If that Federal Funds Rate comes down, [then] lenders are more willing to reduce their capital requirements.
[A second catalyst] will be a reduction in the construction costs, which includes labor and lumber and steel. We’re starting to see that.
The third thing is going to be the capability of getting groups to build again. When the capital is there and when the reasonable cost base is there, then I think we’re going to see an increase in construction again. This rental segment does serve an important need where we have a shortage of housing.
BUILDER: How do the forecasts for a recession impact the outlook and expectation for the sector?
Sullivan: There’s a lot of levers to pull there. If we see a recession that brings further job losses, that hurts the for-sale market more than it hurts the rental market. A downpayment and qualifying for a mortgage—[you’ve] got to have a job if you’re going to get a mortgage. So, there’s the capability of the rental market holding up a little better during the recession, but any time we have job losses, it can be painful. But, overall, I think that even if we do have a recession, the rental market holds up a little better.
BTR, whether it’s [purpose-built] single-family or [horizontal] apartments, it’s a segmentation opportunity to enhance a community or a new master plan. There’s a great deal of success with this. Also with affordability becoming such an issue, the rental side of the world has a very long runway because it’s an outflow for a consumer to choose a location and not have to qualify for a mortgage, get a downpayment, and keep it up.
BUILDER: How would you characterize the outlook for the market?
Sullivan: I think caution is the word of the day. Optimism is when you lift your head up and look down the road, because there’s demographic factors and supply and demand factors that very much support a continued expansion of this space, but right now it’s kind of on pause. It won’t stay that way. I think the second half of the year, we start to see some thawing occur.
BUILDER: What is the profile of renters in the BTR space, and what market characteristics are favorable for BTR?
Sullivan: They are typically renters by choice or financial necessity. Most of them, particularly the renters that are in the single-family homes, are pre-buyers. They are just biding their time and saving so they can get that downpayment.
The largest [segment of] renters is the millennial, followed by Gen X and then by the baby boomer. The baby boomer, we have got some interesting opportunities here. We’ve seen it on a small basis, but I think we’re going to see more of it: The baby boomer as a baby chaser, following around the kids so they can be around the grandkids. I think that the BTR space plays really well to that cohort. The flexibility and privacy it allows is a step up from a pure apartment. I’m speaking specifically about horizontal apartments, but also the same flexibility holds for a single-family rental home.
When you look at when people don’t own and why they don’t own, affordability comes into it. Typically, in most markets it’s much cheaper to rent than own, just on a monthly payment basis. Once again, go back to the fact you don’t have to qualify and you don’t have to come up with the downpayment. This plays into the long-term opportunity. [For successful BTR markets], look at the markets where there is: 1. job growth, 2. in-migration, 3. a baby chaser market. This includes Charlotte and Raleigh, North Carolina; Atlanta; Austin, Texas; and Phoenix.
BUILDER: What trends are emerging in the BTR space?
Sullivan: Amenities are a big thing, and the amenity race is on. But I think more than amenities, the utility of the home, access to a garage, and a bigger backyard are probably just as important as having a big recreational facility. One of the things I think every place has, whether we’re talking about horizontal apartments or purpose-built single-family rentals, is a dog park.