Capital Corner: Explosive Build-to-Rent Sector Spurs New Capital Sources, Finance Options

Single-family build-to-rent is a booming sector of the commercial real estate industry for renters, developers, investors, and now lenders. Read Northmarq’s newest research report focused on this sector.

Listen to Jeff and Trevor discuss this property sector in the October Capital Corner podcast.

“There’s an overwhelming amount of optimism geared toward where the space is heading from a renter and operational aspect, but also a capital markets perspective,” says Trevor Koskovich, president of investment sales with Northmarq.

The build-to-rent market, still in its infancy, is quickly expanding into the fastest-growing markets of the U.S., particularly the Southwest, Texas, and the Southeast.

While Phoenix and Dallas are hot spots, “We're seeing build-to-rent in Florida, the Carolinas, Vegas, and across all markets in Texas, the Midwest, and generally throughout the Southeast,” Koskovich notes.

Robust renter demand is driving this expansion. Build-to-rent offers renters new options fueled by its flexibility, affordability, and as an alternative to the tight housing market. The largest renter pools buoying demand are baby boomers and millennials.

“Build-to-rent offers all the benefits of homeownership, including the livability, awesome amenities, and the kind of maintenance that comes from professionally managed apartment communities,” says Koskovich. 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.This explosive demand has led to escalating lender interest.

“From a lending perspective, there’s excitement around the space,” notes Jeff Erxleben, executive vice president -- regional managing director with NorthMarq. “The newness of the product coming to the market, along with the quality and longevity of the fundamentals within the space, are giving really firm footing for lenders.”

Freddie Mac and Fannie Mae are very bullish on the sector and aggressively pursuing opportunities. Outside of the agencies, traditional banks, life insurance companies, and private debt funds looking to expand their portfolios are active throughout all stages of build-to-rent.

“From construction financing throughout the entire capital stack, there’s a lending solution for the product,” Erxleben notes.

Equity, in particular, is flooding the space.

“Equity was probably sooner to the game in pursuing this product, and so there remains a lot of equity capital looking for build-to-rent opportunities including everything from development to acquisition equity,” Erxleben continues.
The strong fundamentals speak for themselves. “When we underwrite these deals, they're performing very well in really good markets, and that just gives solid traction for everybody to get excited about the space,” Erxleben adds. That means a more competitive environment for borrowers.

“Capital is now available specific to the space, and that’s opened the eyes of the investment community leading to more entrants in the sector,” says Koskovich.

Investor response is robust. “We're probably only in the second inning of build-to-rent,” Koskovich notes. “It's very early on, and the demand from a capital perspective, but also an operational perspective, continues to expand. The next 24 to 36 months should be strong for this segment, and I expect that build-to-rent will be a permanent fixture of residential housing in the U.S.”

From a lending perspective, more lenders are coming to the table with aggressive options. “It will continue to be an asset class that offers an excellent execution,” Erxleben adds.