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What if you could live in a home with a yard and a garage without crowdfunding a downpayment, stomaching an 8 percent mortgage rate, or replacing a leaky roof? That appeals to many. They capitalize on the advantages of single-family living without requiring a capital stockpile. That’s the story behind the build-to-rent housing market.
Build-to-rent, a subset of the single-family rental market, remains a bit of an undervalued niche in real estate. According to Yardi Matrix, build-to-rent accounts for about 1.7 percent of the 20 million units in the single-family rental market. However, the market is growing.
CoStar reported that investors recently have poured $3 billion into build-to-rent housing, anticipating continued demand for the product.
We’re similarly intrigued with the long-term investment potential of build-to-rent, which taps several fertile markets: young homeowners who aren’t interested or don’t have the cash to buy and retirees who want to invest their home equity in lifestyle. Here’s what we like about build-to-rent and why the market should grow.
The basics of build-to-rent
The build-to-rent concept is simple. Many people want to live in single-family homes and neighborhoods but can’t, or don’t want to, deal with the strains of ownership. So they rent.
Single-family rental homes, and subsequently communities, grew in popularity following the subprime mortgage crisis of 2008 that wiped out so much equity. The interest loop has returned in the past few years, as the rental market grew substantially against rising mortgage rates and construction costs.
Build-to-rent hits the current economic sweet spot because of relatively strong employment rates and generationally high mortgage rates. That combination has prompted many people, including young families, to rent for longer.
In addition, build-to-rent hits a lifestyle sweet spot. Renters get their own four walls, often more interior space, perhaps some greenspace and maintenance support. They don’t get a mortgage, real estate taxes or a headache when the HVAC starts rattling.
For young renters, the financial considerations make build-to-rent attractive. For older renters, the lifestyle benefits might be the draw. The market offers benefits to multiple audiences.
Why build-to-rent is growing
The housing market in 2024 continues its slow growth pace due to pricing and financing. However, demand isn’t falling. Build-to-rent addresses demand by adding inventory to a housing market lacking it. According to CBRE, 7 percent of single-family home construction is in the build-to-rent market.
Though millennials are earning strong wages across professional classes, they have more debt, notably in student loans, and lack capital for home down payments. So they’re renting longer — and are happier doing so.
A RealPage study found that 66 percent of renters are satisfied with renting, and 63 percent are renting for reasons beyond finances. As they outgrow or seek a change from multifamily rentals, these renters often turn toward single-family.
Meanwhile, U.S. homeowners are sitting on more than $30 trillion of home equity, according to the St. Louis Federal Reserve, and some folks are taking profit. In particular, retirees have the option to sell their homes, rent in the single-family market and put their capital to other uses. Renting is a popular option for people who want to ditch their high-maintenance houses, rent a house and go to Thailand.
In many submarkets, renting is cheaper than owning. Redfin found that homeownership generally costs 25 percent more per month than renting. Only four markets (Detroit, Philadelphia, Cleveland and Houston) offered better value for homeowners, according to Redfin.
What’s more, many homeowners learned during the late 2000s housing crisis that equity can be fleeting. A single-family home without the financial headache is a growing option across generations.
Investing in build-to-rent
The single-family rental market remains a strong investment. The submarket outperformed multifamily in general, showing 4.6 percent year-over-year rent growth in 2023, according to Zillow. Single-family rents are more than 35 percent higher than they were before the pandemic, with Zillow forecasting single-family rentals as the “new starter home.”
In 2023, we purchased an 87-unit, single-family development in Knoxville, Tennessee, that has 100-percent occupancy and a long waitlist.
The demand needs supply, which build-to-rent can provide. CBRE sees strong investment fundamentals: high rent growth, low vacancy rates (4.8 percent in Q4 2022), and lower turnover than multifamily properties.
Existing stock is comparatively nominal but growing in the single-family marketplace. RealPage reported in late 2023 that about 113,000 build-to-rent units were under construction. The market needs more, particularly in the Sun Belt, where about 67 percent of that construction is centered.
Still, investors should be cautious for a few reasons. Build-to-rent requires scale, making it the growing province of institutional investors. MetLife predicted that institutional investors could control 40 percent of the single-family rental stock by 2030, leading some U.S. legislators to suggest guardrails on such buying.
Further, construction and borrowing costs remain high, giving some investors pause about building. Ivy Zelman, CEO of the research associate Zelman & Associates, said in a recent Oxbow Advisors interview that the build-to-rent market is “under pressure.”
“We’re seeing build-to-rent developers trying to sell a lot of communities to builders for the for-sale market because of the challenges with higher costs,” Zelman said. “We see that market right now under a lot of pressure, but don’t expect it to go away.”
The last point is critical. Multifamily housing is a long-term investment across all platforms. The single-family market has shown tremendous resilience, even growth, in a tumultuous period for real estate. Build-to-rent is poised to capitalize in that market despite short-term challenges.
MetLife Investment Management has projected that single-family homes will account for 80 percent of rental housing construction this decade. Within that framework, build-to-rent communities will become favorable assets.
Though it can be tested, the single-family rental market manages economic and regional forces better than others and continues to be a sound investment. Build-to-rent represents an emerging subset of that market. Headwinds will rise, but the long-term forecast shows few clouds on the horizon.
Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multifamily properties.
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