Why are investors optimistic about the rental home market?

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Many people would like to live in a house with a yard and a garage, without having to raise funds through crowdfunding for a down payment, worrying about an 8% interest rate, or replacing a leaking roof. This appeals to many. They benefit from living in single-family homes without the need to build equity. Here’s the story of the rental construction market. Build-to-rent, a subset of the single-family rental market, remains somewhat of an undervalued segment of the real estate market. According to Yardi Matrix, build-to-rent accounts for about 1.7% of the 20 million single-family rental properties. However, the market is growing. CoStar reported that investors have recently poured $3 billion into build-to-rent projects, anticipating an increase in demand for this product. We are also intrigued by the potential for long-term investments in build-to-rent, which taps into several fertile markets: young homeowners who are either uninterested or lack the funds to buy, and retirees who want to invest their capital in a lifestyle. Here’s what we like about build-to-rent and why the market should grow.

Basics of construction for rental

The concept of build-to-rent is simple. Many people want to live in single-family homes and neighborhoods but cannot or do not want to deal with the issues of ownership. Therefore, they rent. Single-family rental homes, and subsequently neighborhoods, became popular after the subprime mortgage crisis in 2008, which wiped out much of the equity. Over the past few years, the rental market has significantly grown amid rising mortgage rates and construction costs. Build-to-rent is entering the market at the right economic moment due to relatively high employment levels and elevated mortgage rates at generational highs. This combination encourages many people, including young families, to rent for the long term. Additionally, build-to-rent fits a lifestyle. Renters get their own four walls, often more living space, possibly green areas, and maintenance support. They do not have to deal with mortgages, property taxes, or the headache when the HVAC system starts making noise. For young renters, financial considerations make build-to-rent appealing. For older renters, lifestyle benefits may be attractive. This market offers advantages for multiple audiences.

Why is rental construction on the rise?

The real estate market in 2024 continues its slow growth due to prices and financing. However, demand is not falling. Rental construction addresses the issue by increasing the volume of properties on the market, as it is experiencing a shortage. According to CBRE, 7% of single-family home construction is dedicated to the rental market. Although millennials earn good salaries in various professional classes, they carry more debt, especially from student loans, and do not have enough capital to purchase homes. As a result, they rent for longer periods—and are happy to do so. A RealPage study showed that 66% of renters are satisfied with their living situation, and 63% rent for reasons unrelated to finances. When they grow up or seek changes in their living arrangements, these renters often turn to renting single-family homes.

Investments in construction for rental purposes

The market for single-family rental homes remains a solid investment. This submarket has outperformed multifamily homes overall, showing a 4.6% year-over-year increase in rental prices in 2023, according to Zillow. Rent for single-family homes is more than 35% higher than it was before the pandemic, and Zillow predicts that single-family rentals will become the "new starter housing." In 2023, we acquired an 87-unit single-family complex in Knoxville, Tennessee, which is 100% occupied with a long waiting list. Demand is outpacing supply, which can be met by building for rent. CBRE sees strong investment fundamentals: high rent growth, low vacancy rates (4.8% in Q4 2022), and lower turnover compared to multifamily properties. The availability of ready properties is relatively low, but it is growing in the single-family real estate market. According to RealPage, about 113,000 single-family rental units are under construction by the end of 2023. The market needs more, especially in the Sun Belt region, where about 67% of this construction is concentrated. However, investors should be cautious for several reasons. Building for rent requires scale, making it of interest to institutional investors. MetLife has suggested that by 2030, institutional investors could control 40% of the single-family rental market, prompting some American lawmakers to propose restrictions on such purchases. Additionally, the cost of construction and loans remains high, causing some investors to reconsider building. Ivy Zelman, CEO of research firm Zelman & Associates, stated in an interview that the build-for-rent market is experiencing "pressure." "We see developers building many rental communities to sell them to builders for the service market due to rising cost issues," Zelman said. "We believe this market is currently under significant pressure, but we do not expect it to disappear." This last point is key. Multifamily housing is a long-term investment across the board. The single-family housing market shows tremendous resilience, even growth, during periods of real estate turbulence. Build-for-rent is poised to take advantage of opportunities in this market despite short-term challenges. MetLife Investment Management forecasts that single-family homes will account for 80% of rental property construction in this decade. Within this concept, rental communities will become valuable assets. While this can be tested, the single-family rental market handles economic and regional challenges better than others and continues to be a reliable investment. Build-for-rent represents an emerging segment of this market. Difficulties may arise, but the long-term outlook does not promise any issues.

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