As more renters consciously choose not to become homebuyers, the build-for-rent (BFR) industry is quietly emerging as a new force in commercial real estate. In fact, both the burgeoning BFR and single-family rental (SFR) sectors are generating considerable interest from institutional investors in the wake of the pandemic.
Industry experts outlined some of the causes and effects taking place within the BFR and SFR business segments during a webinar hosted by France Media on Wednesday, April 7. The event was titled “Everything You Need to Know About the Single-Family Rental and Build-For-Rent Market.”
Moderated by David Howard, executive director of the National Rental Home Council, panelists included Keaton Merrell, managing director, Walker & Dunlop; Jonathan Ellenzweig, chief investment officer, Tricon Residential; Don Walker, managing principal and chief financial officer, John Burns Consulting; and Mark Peterson, director of the Build-for-Rent (BFR) division at SVN | SFRhub Advisors.
Strong Real Estate Vital Signs
Single-family rentals have hit a 25-year high in occupancy, according to John Burns Consulting. Occupancy rates for the product type are at 95 percent as of the fourth quarter of 2020. The BFR and SFR sectors have grown as more of the population yearns for a home, but finds renting a more attractive option, said Walker of John Burns Consulting, which tracks the sectors.
Because of rising home prices in many metro areas over the past decade, a large percentage of people ages 25 to 44 have delayed buying a home due to the financial resources required by lenders post-recession. Also, many renters have outgrown apartments and need larger spaces. Most SFR and BFR renters are affluent, have an average income of just under $100,000 per year, are educated, married and have about 3.2 people per household.
The average age of a BFR/SFR renter is 40, with 78 percent between the ages of 25 and 54. During the pandemic, as many people worked from home or generally sought more space, the BFR market continued to flourish.
As renters age, many get married and start families. They no longer see apartment life as attractive, yet they have no desire to own property.
“Only about 11 percent of apartment units have three or more bedrooms,” said Walker. “These are families that need more space. Sixty-five percent of single-family rental homes have three or more bedrooms. That’s an important driver.”
Products in the BFR/SFR space range from so-called horizontal apartments (single-family detached and attached homes that usually include one to three bedrooms) to townhomes, traditional detached single-family homes and even luxury single-family properties.
Webinar panelists were quick to define the difference between the SFR and BFR business segments. While SFR homes make up about 13 percent of the total market for rental housing, they are generally rented by mom-and-pop landlords and most of the properties are at least 20 years old.
BFR is generally the term used when a controlling party — usually a regional or national operator — acquires all or most of a subdivision or area and builds either single-family homes or a mix of single-family, townhomes and multifamily units for rent.
This is generally carried out by professional developers who operate on a national or regional scale. Government-sponsored enterprises Fannie Mae and Freddie Mac view BFR products favorably from a financing standpoint, whereas the agencies have little interest in scattered single-family rental portfolios of one-off assets.
“SFR is a four-letter word for the agencies,” said Merrell. “They’ve made it clear that they are not in that business. They are only in BFR. They want purpose-built, for-rent contiguous communities.”
Follow the Money
Institutional investment in the sector is also occurring at historic levels, with nearly $5 billion invested in the sector in 2020 alone by groups like JP Morgan Asset Management, Nuveen, Brookfield Asset Management, Blackstone, Rockpoint Group and Koch Industries. These investors see opportunity in a sector that shows consistency in product type and rent base at a time when other asset classes, like office buildings and hospitality, are out of favor.
Partnering with astute, established operators like TriCon Residential, Invitation Homes, Front Yard Residential and Sparrow, institutional investment is starting to fuel future growth in the industry. That growth has continued in 2021, according to Walker, who cited the following deals:
- In January, Avanta Residential, a division of Hunt Companies, partnered with Iron Point Partners to develop BFR properties across the country;
- In March, Lennar launched a $4 billion BFR platform with Allianz and Centerbridge;
- and Great Gulf formed a partnership with Westdale, providing $200 million in equity to build 1,000 to 2,000 BFR homes per year.
There are a number of nuances to the BFR and SFR spaces, said panelists. Chief among them is the acquisition process. If buying single-family properties on a one-off basis, professional buyers will compete against homebuyers. In heated markets, individuals often have the ability and willingness to drive prices higher, since they are not attempting to buy multiple properties that are similar in type or at a desired cap rate that fits investment criteria.
Heated markets can often make acquisitions difficult, which is why many BFR operators prefer to partner with master developers and purchase districts or neighborhoods in larger developments that can be tailored to BFR properties.
Model the Masters
Operations is another nuance to the business. Because BFR renters are choosing to rent, they expect a strong level of customer service and maintenance, operations and other transactions to be at a high level. Ellenzweig said that at TriCon, the company looks to leaders in the customer service field — such as Southwest Airlines and Zappos — as models.
“We are in the customer service business,” he explained. “Some people might say we are in the real estate investment business or development, or that we do leasing and construction. Those things are all true, but number one — front and center — we are in the customer service business.”
Ellenzweig added that the best way to perform in this industry is to serve your customers. “If you can give them a high-quality product and a reliable, high-quality level of service, they will stay in your homes for longer, take care of your homes and respect your community — and you will thrive.”
“The management side of BFR is super important,” echoed Walker. “We’ve seen cases where someone saved a few dollars by not having the best management company in place. They then hired the best local property management company and absorption doubled.”
Generating excitement about the property and community — the marketing component — is just the first step in how BFR operators need to care for residents, according to Walker.
“Customer care and management are the more important aspects of having a successful community.”
— Randall Shearin