The New Face Of Rental Housing: Single-Family Built-For-Rent
Sometimes a small niche is growing so rapidly and becoming so important that it cannot be ignored. Whether you choose to abbreviate it BFR, B2R, or choose from a host of other iterations, the “build-to-rent” niche comprises only 5% of homes built, but it is growing rapidly and highlighting some important emerging trends in housing demand.
Simply put, instead of opting for a standard apartment unit, some renters incline toward more of a single-family residential experience with the benefit of a professionally-managed and amenitized community. One fast-growing developer in this niche, NexMetro, markets their Avilla brand as “Rents like an Apartment. Lives like a home.”
These rental single-family communities typically offer one-, two- and, three-bedroom (and sometimes four-bedroom) attached or detached homes with upscale finishes, high ceilings, and private yards for each unit, a step above what renters can get in an apartment building. Unit appointments and finishes are often higher than in typical apartments, including stainless-steel appliances, quartz countertops, in-unit washers and dryers, and hardwood-style flooring throughout the home.
Developers say that renters of this type of product are “stickier” than typical apartment renters because they see their rental home as more of a long-term decision. Renewal rates are often higher than those for apartments.
Rent increases have consistently outpaced those in conventional apartments, and sometimes the margin is quite wide. “Across our Avilla neighborhoods, we have seen rent growth rates of 6% to more than 11%,” said Jacque Petroulakis, executive vice president of NexMetro. NexMetro developed 11 communities in the Phoenix area between 2014 and 2019, and now they are expanding into more areas.
Professional millennials equal about one-third of NexMetro’s renters, and close to 60% of the residents are single women.
NexMetro’s Avilla neighborhoods typically achieve a premium rental rate above more traditional apartment units. A quantitative analysis conducted by RCLCO found that these developments have achieved an average premium of 16% (on average rent per unit) over newest nearby traditional apartment communities. What is even more striking is that the premium grows to 24% after adjustments are made to normalize for unit size, age, and location.
Petroulakis said that NexMetro has had some prospective residents come and mention that they need a residence to live in while their long-term home is being constructed, “and sometimes that home that is being constructed is one they are planning to RENT!”
Their communities achieve a discount of 17% to single-family homes, which are typically much larger in size. After adjustments for unit size and age, NexMetro’s units achieve a premium of 16% above the single-family homes.
A Florida company that has transacted on more than $1 billion worth of single-family rental homes has recently been buying newly-constructed homes from builders across the southeastern U.S., Texas and Nevada and renting them out. The founder of Clean Living Communities (TM), Jordan Kavana, says that 60% of their renters are young families. The average rent in their units, throughout the southeastern U.S., ranges from $1,800 to $2,500 per month, and the sizes are 15% to 20% larger than typical nearby apartment units. “Demand is strong,” said Kavana. “We are seeing 8% to 9% growth in rents within some of our communities; never less than 4%-5%.” That is significantly faster than the average rate of rent growth in rental apartments.
Kavana’s company uses 24-month leases, and fully 80% of their tenants renew after the two-year term expires, which is much higher than the average renewal rate for apartments. Clean Living Communities emphasizes health and wellness, offering spaces for yoga or meditation, and provides free education for tenants regarding subjects like nutrition and sleep and will be rolling out a program in 2020 with some leaders in the preventative health and wellness space.
The business is set to grow even faster in the years ahead. The company has formed a partnership with a national homebuilding company and plans to develop and operate 3,000 units on land owned by Clean Living Communities over the next 24 to 36 months which will all be owned and managed by the platform that Kavana started in 2008.
In a separate big-builder deal, Toll Brothers has formed a $400 million joint venture with a financial partner and an established build-to-rent developer called BB Living. Doug Yearley, CEO of Toll Brothers said on the company’s quarterly earnings call, “we are initially targeting the Phoenix, Denver, Las Vegas, Jacksonville, Dallas, Houston and Boise markets. While Toll Brothers has committed a relatively modest $60 million to this partnership, we believe this investment will produce strong returns over time.”
American Homes 4 Rent (AMH), which leases 53,000 houses (mostly acquisitions) across 22 states, has started a major new initiative developing land and building homes for rent. David Singelyn, the company’s CEO, said in a recent earnings presentation that they were set to build approximately 800 homes in 2019. He went on to project that they would triple that number in 2020, with further increases in future years. They are now developing homes for rent in 15 markets.
Lennar Homes, JMC Homes, AHV Communities, and Camillo Properties are also building thousands of homes for rent in various places nationwide.
The New Face of Renters
Tenants at these kinds of developments span professional millennials, move-up families/”life transition” (i.e., divorce), and empty-nesters. Most renters are younger households tired of apartments but not ready or able to buy a home. In addition, there is significant demand from Boomer households who are downsizing from owned single family but don’t want apartment living.
Millennials are finally starting to have kids, and that is driving some sudden shifts in housing demand. Rental homes and townhomes appeal to many of the older Millennials who have children because they can have a yard and more interior space.
Millennials are having children ten years “late,” but they are having them. And that is influencing the kinds of rental housing they seek. Population growth is now faster in the 35+ group than in the 25-34 group, and it is these “older” Millennials who are the ones having kids.
And the lock-and-leave convenience of renting is appealing to all generational groups, particularly the Baby Boomers whose kids have left the nest.
The “Older” Millennials Are Driving Growth
Growth in the 35+ population is now greater than the growth in the 25-34 age group.
Single-Family Rentals Are Big Business
The exhibit below breaks down the rental stock into the various product types. Detached rental homes are almost as numerous as units in small rental buildings.
Breakout of housing stock from Census data
Source: RCLCO; Census Data
The SFR market started to grow rapidly after the great recession as institutional investors bought hundreds of thousands of units around the country out of foreclosure/REO, and they bought bulk unsold inventory from builders. Today’s SFR market, however, is dominated by small investors; institutional investors now own less than 2% of the rental homes.
RCLCO is anticipating strong growth in the B2R business. And remember: it is a counter-cyclical business, as more people tend to rent during recessions. That is a point that it not lost on investors and developers who are getting nervous about the business cycle.
Builders, developers, and investors have a great growth opportunity, but a cookie-cutter approach won’t be the winning formula. Careful attention will have to be paid to the specific character of the market and neighborhood in which the homes will be built.