Why Is Build-to-Rent Here to Stay, And Why Should You Consider It as An Investor?

New capital continues to pour into this new, exploding space, and more financing options are available

Build-to-rent is one of the fastest-growing asset classes in the U.S. rental housing market.

The surging demand for single-family rental homes is creating new opportunities for investors, developers, builders, and renters in burgeoning U.S. markets. As new capital is pouring into the growing build-to-rent sector, more financing options are available.

The booming build-to-rent market was active pre-pandemic and even more so now. It provides new options for renters, driven by its affordability, flexibility, and as an alternative to the tight single-family housing market. Additionally, the shift to working from home driven by COVID-19 is fueling more people to seek larger rental units. Some employees may continue working remotely post-pandemic, at least part time. 

Millennials are a significant group behind the build-to-rent movement, as they relocate to the suburbs seeking more space, yet still opt to rent. They’re also looking for modern amenities that new build-to-rent communities offer. Other groups are also attracted to this rental option including empty nesters.

“Build-to-rent is such an exploding property type,” says Trevor Koskovich, president of NorthMarq’s Investment Sales business and leader of the new National Build-to-Rent team. “It gives tons of flexibility to renters while also creating a consistent value creation for the investor. Beyond those benefits, capital sources are now understanding the intrinsic opportunity in this new asset class, meaning that buyers have new options for structuring the financing.”

More financing is available in this expanding space
Capital for build-to-rent communities is becoming more readily available as lenders realize the impressive yields from this investment class.

Government-sponsored enterprises Fannie Mae and Freddie Mac began lending in the build-to-rent space in mid-2020. NorthMarq is a Fannie and Freddie lender, which has broadened financing options for investors. NorthMarq is a direct lender for this product type and already one of the largest direct lenders currently making these loans.

“We’re seeing more access to investment capital through debt and equity offerings in the build-to-rent space, but also a desire from investors, who can go out and achieve the same levels of ROI in build-to-rent that they can from an apartment building. That truly makes this a unique market that’s expanding quite dramatically,” Koskovich explains.

As the build-to-rent sector flourishes, NorthMarq has already completed more than $500 million in single-family home rental transactions in the U.S., and that’s just the beginning of things to come, Koskovich notes.

New build-to-rent communities will likely be concentrated in the Southwest, Texas, and the Southeast that boast space to expand, population growth, and high job growth rates, Koskovich says. Hot markets include Phoenix; Texas, led by Dallas-Fort Worth and Austin; and the Southeast including Orlando and Tampa, Fla., Atlanta; and the Carolinas.

Developers need to control sufficient land to create an entire “horizontal” neighborhood of rental homes run by the same multifamily management operator. This enables 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 submarkets, metro areas, or regions.

As single-family build-to-rent projects have been completed and leased up, properties have been selling. Investor response has been robust, with demand driven by properties that are nearly fully leased, expected to have low renter turnover, and post above-average rent growth in the next few years.

Pricing for single-family build-to-rent projects is generally at the higher end of the range in markets where sales have closed. Per-unit pricing for single-family build-to-rent properties is generally consistent with newer, Class A, garden-style, suburban apartment properties.

The booming sector will continue to fill a void in the rental housing market. Build-to-rent properties have proven profitable for developers and investors and popular with today’s modern renters.

“We’re expecting it to be a tremendously large asset class in the years ahead,” Koskovich notes.

Early in 2021, NorthMarq started a National Build-to-Rent practice group comprised of financing and investment sales experts from across the country. Trevor Koskovich leads the group, which has completed 11 BTR sales and financing transactions valued at more than $500 million.

Northmarq is a full-service capital markets resource for commercial real estate investors, offering seamless collaboration with top experts in debt, equity, investment sales, loan servicing, and fund management. The company combines industry-leading capabilities with a flexible structure, enabling its national team of experienced professionals to create innovative solutions for clients. Northmarq's solid foundation and entrepreneurial approach have built an annual transaction volume of more than $39 billion and a loan servicing portfolio of more than $76 billion. Through the 2022 acquisition of Stan Johnson Company and Four Pillars Capital Markets, Northmarq established itself as a provider of opportunities across all major asset classes. For more information, visit: www.northmarq.com.