As Booming Build-to-Rent Continues Expanding, New Capital Pours into Sector and Finance Options Soar
Billions of dollars of debt and equity capital are charging into this investment class
MINNEAPOLIS, MINNESOTA (October 8, 2021) - Developers, investors, renters, and now lenders, are catching the wave of single-family build-to-rent, one of the hottest sectors in the U.S. multifamily housing market. Read the full report.
If build-to-rent isn’t in your market yet, it’s likely heading your way.
Northmarq is very active in this thriving space having launched in 2021 a National Build-to-Rent practice group comprised of dedicated debt, equity, and investment sales experts from across the country. Northmarq has already completed more than $1.5 billion in single-family home rental transactions in the U.S. and has over 15 active listings and assignments.
Billions of dollars of debt and equity capital are moving into this investment class with new entrants on the scene seemingly monthly. Lenders recognize build-to-rent’s impressive fundamentals and are offering developers and investors new options for structuring their financing. What was a niche product in only a handful of markets a couple of years ago is spreading across some of the fastest-growing areas of the U.S., particularly the Southwest, Texas, and the Southeast.
Strong demand from renters is fueling the expansion. Additionally, one of the biggest advancements of build-to-rent product is developers are creating purposeful neighborhoods of rental homes operated by the same multifamily management operator. This allows the owner to operate cost-efficiently when managing the rental and maintenance of the homes, which is more attractive to investors than portfolios of traditional single-family rentals that could be scattered across metros, submarkets, and regions.
Numerous debt financing options available for development, acquisitions
As build-to-rent velocity accelerates, investors and lenders are becoming more familiar and comfortable with the product. More and more traditional multifamily lenders are financing these properties. Lenders range from Freddie Mac, Fannie Mae, and life insurance companies, traditional banks, and private debt funds seeking to expand their portfolios. Debt providers are becoming wider and deeper as build-to-rent expands. Terms are attractive, with lenders willing to increase the loan-to-cost amounts at lower interest rates. Lender competition is heating up with lenders seeking to gain traction within the property type.
For acquisition and recapitalization, Fannie Mae and Freddie Mac are very active debt options in the space. Northmarq, as a direct Freddie and Fannie lender, is one of the largest direct agency lenders currently making these loans. We recently completed the sale of two projects with more than 500 units in Phoenix and simultaneously arranged acquisition financing through Northmarq’s Fannie Mae platform.
Equity pours into the sector
More than $10 billion in equity capital is expected to move into build-to-rent properties this year alone, after roughly a dozen institutions announced plans to expand into the sector. For example, Blackstone announced a $6 billion acquisition of Home Partners of America, and Invesco Real Estate partnered with Mynd Management, committing $5 billion to purchase 20,000 single-family homes.
Investor response has been robust. More than $900 million in build-to-rent transactions closed in 2020, up from $400 million in 2019. Transaction activity continues to accelerate in 2021. The number of properties that sold during the first half of was nearly identical to the total sold in all of 2020.
A strong second half is underway with several properties slated to close by year-end. Similar to conventional multifamily, pricing is pushing higher and cap rates have compressed. The median price surpassed $250,000 per unit in 2020, while the median price in transactions closed year to date exceeds $300,000 per unit. Robust investor demand and increasing rents are driving up pricing.
Why is build-to-rent popular with renters?
Build-to-rent provides renters new options fueled by its affordability, flexibility, and as an alternative to the tight housing market. Millennials are a big force behind the build-to-rent movement, as they move to the suburbs seeking more space, yet still opt to rent. They’re looking for modern amenities that new build-to-rent communities offer. Empty nesters are also attracted to this rental option. Hot markets include Phoenix; Texas, led by Dallas-Fort Worth and Austin; and the Southeast including Orlando and Tampa, Fla., Atlanta; and the Carolinas.
Dallas-Fort Worth and the Carolinas, in particular, are up-and-coming markets to watch. Buoyed by booming job markets, fast-growing populations, and increasing housing prices, Dallas-Fort Worth and North and South Carolina are becoming top spots for new build-to-rent communities.
The product is still in its early stages in Dallas-Fort Worth with approximately a dozen build-to-rent properties delivered since 2018. However, activity is accelerating rapidly, with another roughly 25 projects under construction or planned, totaling more than 3,100 units.
There are roughly 25 existing build-to-rent communities across the Carolinas with several more projects in the pipeline, which should deliver in the next few years. Thriving build-to-rent cities include Charlotte and Greenville, S.C., and Raleigh-Durham and Myrtle Beach, N.C.