August 29, 2022

Build For Rent: Single Family Living with Multifamily Appeal

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Dave Seymour

Build For Rent: Single Family Living with Multifamily Appeal

Build for rent single-family communities (BFR) is the hottest thing in residential development with billions of dollars from major players lining up to meet the growing demand for this relatively new asset class.

Let’s start by getting clear on what build for rent truly is and what it isn’t.

Build for rent consists of new single-family homes/townhouses built from the ground-up for the specific purpose of renting to tenants within a contiguous master-planned community. It is not homes built for sale and then converted to rental properties or scattered SFR rentals.

Just like there are different variations of traditional multifamily housing, from garden style to high rises, the BFR sector also comes with its own sub-sectors. Here are a few of the main BFR products that are coming to the market.

BFR Product Types

Each of the different BFR products serve a similar yet unique tenant base. Whereas the general tenant base for any BFR community can be typically seen as more families or young professionals, these different community types have unique living experiences that are more attractive to certain demographics.

And with each different BFR product, developers have unique considerations from land acquisition (single platted horizontal multifamily or individually platted lots) through to the options available to them at disposition.

The growth potential has institutional investors flooding into the space committing over $50 billion in recent years. However, this is still a small slice of the 3.4T single family market share and these commitments are struggling to find enough quality projects to deploy their capital and meet the demand.

Where did BFR come from?

The business model for BFR can be traced back as far as the1980s, however single-family rentals really weren’t seen as an institutional asset class until the aftermath of the 2000s housing bubble. With banks holding tens of thousands of bad mortgages on their books, institutional investors seized the opportunity to purchase these properties in bulk at steep discounts. Over the next 8 or so years, institutional investors slowly began participating more in the single-family rental space, yet mostly as scattered single-family rentals with properties spread out amongst neighborhoods of homes for sale. During this time, technology advances and professional property management proved single family rentals as a viable institutional asset class. However, the asset class experienced a major rejuvenation at the onset of the COVID-19 pandemic as renters sought more space from their multifamily apartments.

Even with the pouring of institutional capital into the single-family rental space, institutions currently only account for 2% of the single-family market, a market nearly equal in size to the multifamily market. In fact, 85%of the single-family market is operated by mom-and-pop owners who control 10 or fewer properties.

So, as we now come out of the pandemic, we have all these renters seeking more space for their lifestyle in a single-family rental, but the current stock of options is largely older, more dilapidated homes that are scattered throughout neighborhoods and often not professionally managed.

With limited availability and affordability in the “for-sale” single family market, millennials and baby boomers alike are turning to the attractive lifestyle that comes with a new BFR community.

How is BFR Development similar and Different to Multifamily?

In general, BFR development is very similar to traditional ground-up multifamily development. However, there are some unique inflection points during development that need consideration that will drastically impact the outcome of the project.

Like multifamily development, the first stage is land identification. At this stage, developers have a few considerations.

The main consideration being to pursue a single plat horizontal multifamily or individually platted lots? There are pros and cons to both strategies but it will impact everything from the type of BFR product, development costs, impact fees, taxes when stabilized, & the flexibility of disposition.

There are numerous disposition strategies in BFR, many of which should be weighed well before breaking ground on a new project. If the intention is to sell the asset, developers often opt for the traditional merchant builder path (build, lease & stabilize, sell), however, in BFR many developers are opting to sell at certificate of occupancy due to the high demand from institutional buyers. On the buy side of this equation, institutions are happy to take on the lease up risk and manage their leasing process in order to control these assets as early as possible. For projects that are individually platted, we are also seeing developers deliver and monetize profits even faster by selling the rentals in manageable tranches. If this path is pursued, the construction loan has to be negotiated for release pricing as soon as the vertical component is complete. The lenders on the buyside of that equation love that path because they are not taking on construction risk, only lease up risk, and the deliveries come in manageable tranches for the lease up team.

We are also seeing some hybrid development joint ventures between institutions and developers where the institutional partner will provide the development equity in order to control the end product.

In parallel to these disposition options, the demand is so high in certain markets that we are seeing pre-sale prices being negotiated between developers and institutional buyers.

For developer/operators intending to hold onto the asset after construction, there is both bridge and agency debt available with terms very comparable to multifamily. We are seeing more lenders becoming increasingly comfortable lending on these assets and the terms are proof of their comfort level. If the developer plans to refinance into permanent agency debt, this is something that should be considered upfront because no tall BFR projects will qualify.

How is Managing a BFR different from multifamily?

The lease up process is very similar to multifamily with comparable marketing expenses. However, once stabilized is where we really start to see the differences. The single family BFR communities experience significantly less turnover rate than multifamily. The turnover costs are higher, but we are seeing nearly half the turnover rate, around 30%. The average single family renter stays in that unit for 5.6 years. Significantly longer than a multifamily renter. Due to the lower turnover rate, less onsite staff is needed, further reducing expense ratios.

These properties typically have more green space to maintain so there is an increase in landscaping costs, however there are often fewer amenities to maintain.

The residents in these communities are comfortable with technology and willing to pay extra for smartphone technology conveniences, adding additional ancillary income opportunities.

For communities under 170units, the management of a BFR community is comparable to managing an HOA.

The Outlook for BFR as an Asset Class:

BFR fills a very logical niche in the U.S. residential market that will continue to expand for the years ahead as the country reconsiders its views on single family renting. The single family rental segment has always existed, yet it is evolving as more professional and institutional investors take on a bigger role than the typical mom-and-pop single family owner. These institutions can operate on a scale that brings more sophisticated management and more capital to the maintenance and operation of the homes. There are many people who want single-family living without the burdens of homeownership and the additional amenities they’ve become accustom to. BFR is here to meet the demand for single family living combined with the appeal that multifamily investing offers.

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