Build-to-rent communities are helping relieve some of the pressure on residential markets plagued by short supply, but is the success of this new product at the expense of traditional multifamily?
It all depends on who you ask, according to a panel of BTR developers at an April 26 Bisnow event.
“I wouldn’t want to be in the multifamily business with people like us coming into the market,” said Bruce McNeilage, CEO and founder of Kinloch Partners, a developer of BTR communities in the Deep South, including Texas. “We’re offering a higher-quality product for not much more than a high-end apartment.”
BTR homes are single-family residences built specifically for the rental market. Single-family rentals are nothing new, but the emergence of BTR communities backed by institutional money is a departure from the mom-and-pop ownership model of the past. Found across the U.S., BTR communities are most common in the Sun Belt. And according to a January report by RentCafé, Dallas-Fort Worth has the third-highest number of BTR homes in the nation.
BTR is viewed as a sound investment by developers because of its revenue potential and stability, McNeilage said. Kinloch is making between 150 and 300 basis points more than a comparable multifamily asset, and sees significantly less turnover than a traditional apartment, he said.
“In a multifamily situation, you have tenants that stay for about two years in an apartment complex,” he said. “We average about five years.”
Despite the BTR model’s strong return on investment, many industry stakeholders believe there is a place for both product types, especially as cities across the U.S. struggle to keep up with the demand for housing.
“There is a supply need that is still out there, we are just a different product,” said Felipe Castillo, managing director for Austin-based Urbana YardHomes. “As much as Texas is growing, that need is only going to grow.”
The Metroplex’s housing shortage could eventually derail some of its momentum in attracting corporate relocations, McNeilage said, but BTRs could be a part of the solution. A March report from Compass Real Estate brokerage said Dallas’ market inventory decreased 53% year-over-year in January, more than three times the national average.
“All of us are creating housing that is needed,” he said. “How do you attract a Fortune 500 company to move into your MSA if there is not enough housing?”
One of the factors curtailing housing supply is a rise in NIMBYism that has made it increasingly difficult to rezone properties for apartments. This makes low-density options like BTR an attractive alternative, but because the product is so new, developers have to put in time and effort to educate municipalities on what BTR is and how it can benefit their community, said Todd Wood, CEO of Christopher Todd Communities.
“When you come to municipalities with a new product, it’s a head-scratcher,” he said. “After they kind of catch on and understand it, they start writing specific ordinances and zoning for the products.”
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Removing the stigma of rentals is another key piece of getting cities to embrace BTRs, said Cyrus Zadeh, CEO of Camden Homes. Developers at the forefront of this emerging industry must set a high standard so municipalities are less afraid of the unknown.
“Just about everybody, at one point in their life, has probably had to rent,” he said. “We have to find a way to change the narrative and work with municipalities to show them good product.”
Critics of the BTR industry claim it discourages wealth creation spurred by homeownership, but others say the housing option is merely a transitional product.
“We love build-for-rent, because they are our future homebuyers,” said Andrew Pieper, vice president of Hillwood Communities. “It’s kind of a test run, if you will, for our communities.”
Castillo said BTR developers partnering with counterparts in the single-family homes for purchase and multifamily space could help BTR remain sustainable in the long term. Having a variety of uses makes neighborhoods more dynamic, he said.
“As developers, we tend to think we know everything, so we stay in our little space,” he said. “But that partnership could probably transition BTR for the next decade.”
Success in the U.S. used to be predicated on owning a home, but Cyrus said the younger generation no longer sees this as a requirement. Simply living in a home is enough for some, he said, which should keep BTRs relevant in the future.
“The traditional narrative was the American dream of owning a home, but the narrative is really living in a home,” he said. “Particularly millennials, they don’t like to be tied down, they want to move around, they want to live in different locations.”