By Jeff Erxleben, president, debt & equity at Northmarq
Liquidity and an incredibly positive outlook for single-family build-to-rent (BTR) properties is helping to offset some of the turbulence developers are experiencing from rising interest rates.
Developers have been ramping up the pace of single-family BTR construction over the past five years with forecasts that call for a record high 60,000 new units to be completed in 2022. That volume shows a steady increase over the 53,000 units completed in 2021 and 49,000 in 2020, according to Northmarq’s recently released Single-Family Build-to-Rent Properties Special Report.
Although financing across all property types has been impacted by upward movement in both short- and long-term borrowing rates, the BTR sector is in a good position to shake off those challenges and maintain its growth momentum. Higher construction and financing costs are being offset by rising rents with year-over-year rent increases, that in many areas of the country, are quite substantial.
Developers also are finding good access to both debt and equity. The number of lenders that are active in the space is expanding as developers move into new markets and continue to prove out business models and performance with successful lease-up and dispositions.
For example, Northmarq’s Dallas regional office provided acquisition financing for the first BTR acquisition made by Morgan Properties, Inc. The 136-unit ParcHaus at Skyline (since re-branded as Elevate at Skyline) was near stabilization at the time of final construction certificate of occupancy. The newly completed community is located in the Dallas suburb of McKinney and offered one- and two-bedroom units at rental rates that were significantly below the cost of local homeownership. The Northmarq team secured the acquisition financing though a regional bank that provided a floating rate loan at very attractive terms.
Plenty of Available Capital
Banks are the dominant sources of construction financing and select balance sheet lenders also are providing construction loans in a larger format. Developers that have a large pipeline of deals might opt for a balance sheet lender that can handle the larger loan volume. On the take-out financing, the agencies are the main sources of capital for stabilized assets. Both Freddie Mac and Fannie Mae have been active in financing BTR properties. Many BTR properties offer a cost-effective alternative to home ownership, which speaks to the mission business of agency lenders. Life insurance companies also are expressing more interest in financing BTR product.
Equity players are looking to gain a bigger foothold in the BTR space, whether that is through joint venture (JV) partnerships on new development or buying stabilized assets. In 2021, companies announced commitments of more than $10 billion toward development and acquisitions in the single-family BTR space. That demand also is evident in sales activity and pricing trends. Projects totaling approximately $2.3 billion changed hands in 2021, more than doubling the 2020 total, according to the Northmarq report. Transaction activity has slowed during the first half of 2022, in large part due to interest rate volatility. However, several properties are actively being marketed for sale and are expected to transact in the coming quarters.
Pricing continues to trend higher for single-family build-to-rent communities. In deals that closed during the fourth quarter alone, the median price reached $360,000 per unit, with about one-third of sales topping $400,000 per unit. For example, Northmarq’s Build-to-Rent group marketed and sold five BTR communities with a total of 411 units for more than $168 million. The communities were located in Arizona, Texas and South Carolina. Currently, Northmarq has two dozen active BTR listings across its national platform, and marketing activity is pointing towards continued upward trajectory in prices in 2022.
Positive Outlook for Demand
The story across the broader rental housing market is strong demand that is being fueled by two different groups – those renting out of necessity or choice. For BTR properties, the affordability of purchasing a single-family home continues to move farther out of reach for many as home price soar and mortgage rates rise. The national median single-family home price approached $370,000 in the first quarter, with annual price growth topping 15 percent, according to the Northmarq report.
Mortgage rates have jumped more than 200 basis points to hover at 5.25 percent. On a $300,000 loan, an increase in mortgage rates from 3.5 percent to 5.25 percent results in an increased interest payment of more than $430 per month. Especially for people where affordability is an issue, or there is a concern about buying a home when values could be at a peak, the BTR sector gives people the type of single-family home they want in a purpose-built format.
On the other side, there is more demand from the “renter by choice” consumer. There is a deep pool of people, including empty nesters and retirees, who prefer to rent versus own a home for a variety of reasons, such as flexibility, convenience and a desire to avoid the maintenance and upkeep that often come with owning a home. That demand is reflected in the BTR fundamentals that remain very strong. Projects being built are leasing very quickly, rents are increasing at a healthy rate and there are no signs of waning investor demand.
Much of the development has been focused on high-growth Sun Belt states that have available land to build. Since the beginning of 2019, the South region has accounted for 46 percent of the delivered BTR units in the country, and in the past year that figure has moved past the 50 percent mark. However, it also is important to note that developers are continuing to expand into new markets nationally. Northmarq is currently tracking roughly 500 BTR projects across more than 20 states.
BTR is a maturing sector that is continuing to attract more and more institutional capital. Although it is still a specialty product, it is no longer the small niche product that it once was. That evolution also is evident in the types of highly amenitized properties that are being built to create not just homes, but purpose-built communities for the people who choose to live there.
Visit here to read Northmarq’s report, Single-Family Build-to-Rent Properties Special Report.