If there were any doubt that student housing stakeholders were quickly moving into the single-family build-to-rent market, the question was just settled for good.
Chicago-based Harrison Street, one of the industry’s biggest players, recently announced a blockbuster deal to form a joint-venture with Core Spaces, one of student housing’s biggest developers. But this venture isn’t about student housing; it will invest up to $1.5 billion in subdivisions with hundreds of rental homes in markets such as Austin, Denver, Dallas, Orlando and Nashville.
“We had an ah-ha moment,” says Justin Gronlie, managing director and Head of Education Real Estate at Harrison Street. He explains that Harrison Street was among the first firms to invest cottage-style student housing back in 2007, and since then, has developed and acquired more than 27 BTR-style student housing communities comprising 19,000 beds. The off-campus single-family style homes in highly amenitized developments are similar to the product in build-to-rent communities. “Due to our unique experience and track record in student housing, we recognized the patterns and magnitude of the BTR opportunity in front of us and pounced at it,” says Gronlie.
Like student cottage projects, build-to-rent (BTR) or build-for-rent (BFR) developments offer detached units, townhomes or flats with yards. The development process and management of both products is fairly similar, though there are some notable differences too (see sidebar).
Student housing developers are positioning themselves to be big players in the BTR market, seeking to outflank the competition. Multifamily developers may find it daunting to construct individual houses. Single-family builders may not know how to manage a rental development. But many student housing developers have already built and managed that kind of product.
“Build-to rent is a natural extension of what we’ve been doing,” says Jeff Githens, president of development at PeakMade Real Estate. The Atlanta-based company has developed about 18,000 beds of student housing, including cottage style units. PeakMade has several BTR projects in pre-development. “We are applying our platform to another real estate vertical,” says Githens.
Fast Start
The BTR market is growing quickly. An analysis by the Joint Center for Housing Studies of Harvard University shows that 49,000 single-family rentals were started in 2020, up from 14,000 in 2009. Some 12 percent of new single-family construction in 2021 was for rentals, according to John Burns Real Estate.
Research firm Yardi Matrix began tracking the segment last year. In 2021, the company tallied about 90,000 units in 722 properties with 50 or more units. Development is mostly centered in the Sunbelt with new construction most prevalent in Dallas, Austin, Phoenix and Las Vegas.
The trend is being fueled by demographics, economics and the pandemic, sources say. Millenials and baby boomers, the nation’s two largest population cohorts, are the target residents. Millennials may not have saved enough to buy a house, yet they are forming families and need the added space of a single-family home. Baby boomers are retiring and ready to ditch the responsibilities and expenses of homeownership. And the pandemic created the need for more space, as people stayed home more, including for work.
Until recently, single-family rentals were operated by small owners or in scattered site locations. Institutional money and private equity have provided much of the startup capital. Yardi Matrix estimates that more than $10 billion has been allocated to the sector over the last few years. New purpose built BTR developments include hundreds of units. Rents are rising and occupancies are high.
“Build-to-rent is an early inning industry, but it could be very large in three to five years,” says Will Baker, senior managing director at Walker & Dunlop. He adds that both debt and equity capital is available for the growing sector. Lenders are interested in the product, but still need to be educated about this emerging rental category, as do municipal officials unfamiliar with BTR. Loan terms are undefined for now. But Baker expects the properties to be underwritten like luxury garden-style apartment projects.
Student housing developers are jumping into the market. They’re hiring BTR experts, forming development teams and seeking sites. As Harrison Street builds out its platform, it expects half of its BTR partners to be student housing developers; the other half single-family home developers.
Student housing giant Landmark Properties, based in Athens, Georgia, plans to start six to eight BTR projects in 2022 and 12 or more in 2023. Until now, the company has specialized only in student housing with 90 projects to date.
Landmark’s first BTR deal is set to close in the second quarter of 2022. The site is located in Spring, Texas, near The Woodlands, a luxury master-planned community in the Houston area. The project will be called The Everstead at Windrose. Landmark’s BTR projects will all be branded with the Everstead name.
“We’re really targeting the Sunbelt,” says Blair Sweeney, Landmark’s managing director of BTR development, who is based in the company’s Atlanta office. Like other developers, Landmark likes the pace of population growth and job formation in the Sunbelt. But Sweeney says the company will seek sites outside the Sunbelt as well, and in general likes infill locations with nearby retail and lifestyle amenities.
According to Yardi Matrix, Phoenix has the most BTR projects (44) and units (6,421), 7.1 percent of the area’s total multifamily market. Other popular BTR spots include metro Dallas with 29 projects (3,400 units); and Las Vegas with 13 projects (3,300 units).
Pick A Spot
The search is on for good sites throughout the South and Mountain West. Student housing developers don’t have to limit the hunt to spots near college campuses. Infill sites are preferred, though some developers are opting for BTR development within master-planned communities.
Core Spaces launched its BTR platform, branded Oxenfree, in 2020. The company has about 3,500 homes under development. They are in the suburbs of metro areas with as an easy commute, high-quality schools and regional conveniences, according to President and Executive Managing Director Dan Goldberg.
The challenge is site selection and being able to decipher the data behind it, according to Gronlie at Harrison Street. The firm looks at for sale home performance, for-rent home performance, demographic trends, employer relocations, local GDP, overall affordability and migration patterns, among other data points. “Unlike other sectors, there isn’t a one size fits all approach to determine success. Because the product is still in its infancy, we have to look at all metrics to make sure we get it right, and from there we will be able to refine our process even further,” says Gronlie.
BTR developments are fairly large in scope. The sites must accommodate about 150 to 200 units.
“We have a great pipeline,” says Russ Murphy, COO and co-founder at Aspen Heights Partners, based Austin, Texas. He says his company has $500 million of BTR projects in the works. Aspen Heights recently launched its BTR brand, Bell Yard. Aspen Heights is seeking parcels with 13 to 40 acres. It is focused on Central Texas and the Charlotte area for now, with plans to expand in Las Vegas, Phoenix and Colorado. Murphy says the company will break ground on five BTR projects this year.
Rising construction and labor costs are a concern for developers. But financing isn’t. Money center banks and debt funds are putting together revolving construction loans for student developers entering the space, according to Timothy Bradley, founder and CEO of TSB Capital Advisors, a Phoenix-based finance firm.
Permanent financing will be available too, says Baker at Walker & Dunlop. “Fannie Mae and Freddie Mac are ready to make these loans,” he notes. The agencies are categorizing the product as horizontal multifamily. Baker adds that the agencies prefer projects on a single tax parcel that have the look and feel of a rental community with defined signage.
Student housing developers plan to scale up to help make the product a big success.
“We’re focused on developing a product type that can be scaled to meet the needs of renters throughout the country. Our programmatic approach will allow us to efficiently develop communities that are compelling and captivating to renters, while providing considerable upside to owners and investors,” says Andy Lallathin, co-founder and managing partner at Coastal Ridge. The company has seven BTR projects in the pipeline with about 1,700 units. The first project is located in Sarasota, Florida, with 274 units. Columbus, Ohio-based Coastal Ridge has some $3.5 billion in assets under management. About 40 percent of its portfolio is comprised of student housing.
Lallathin says the company’s BTR strategy is similar to that of the company’s approach to student housing. Coastal Ridge is developing several BTR prototypes that can be replicated in different markets. “We are leveraging our best-in-class operations platform, combined with our programmatic approach, to create immense value for all stakeholders,” he says.
Finding The Right Mix
The big BTR differentiator is the style of the units. They consist of single-family homes, townhomes or horizontal apartments, or a mix of those styles.
The units have private first-floor entries, a backyard and a patio. “We provide a residential living experience in a Class A multifamily community,” says Lallathin. Coastal Ridge is building freestanding single-family houses, and one-bedroom attached duplexes. Layouts differ. Most are one-story buildings though some have two stories.
BTR units range in size from about 900 to 2,500 square feet. But they differ in design from student cottages, which have no master bedroom and where all bedrooms are the same size. Finishes differ too. Student cottages are built to withstand high turnover and more wear and tear. BTR units have higher finishes, and many have private garages.
PeakMade has designed a series of prototype units for the BTR market. The homes do not have four bedrooms like a student cottage. Instead, the single-family homes will have two to three bedrooms and the horizontal apartments will feature one or two-bedroom flats. When it comes to rental rates, privacy comes at a price. BTR rents have premiums that are about 15 percent to 20 percent above those of traditional multifamily products, sources say. Pricing is fine-tuned based on the local market and the type of product.
“We are still trying to figure out rental rates,” says Stephen Furr, vice president of development at PeakMade. He joined the company in June 2021 to help build out its BTR platform. “There are not a lot of comps in this market,” he says. One way to understand the market is by comparing the affordability of renting versus buying. But he notes that BTR products are attracting a lot of renters by choice whose income would more than support a home purchase. “They could own but they want the flexibility, the lifestyle but also the privacy,” says Furr.
Yardi Matrix tracks rents and occupancies in established BTR projects. Monthly rents range from about $1,000 to more than $3,000, depending on the market and the size of the unit. Occupancies are typically 95 percent or higher. In San Diego, for example, BTR projects had an average monthly rent in December 2021 of $3,293 and an occupancy rate of 98 percent.
What About Amenities?
Student housing developers like to refer to the industry’s “arms race” to build the most highly amenitized student projects. One developer tries to outdo the other with add-ons such as digitally equipped fitness centers and infinity edge swimming pools.
Not so much in the BTR market. Amenities, in general, are being kept to a manageable minimum. “The amenity package is tailored to conventional renters,” says Landmark’s Sweeney. A slimmed down clubhouse might feature a business center, community room, and an on-site leasing office. Other extras, depending on the site, might include a pool, child’s play area and walking trails.
Student housing developers and investors are bullish on the outlook for the emerging sector. Affordability challenges in the U.S. housing market will continue to drive demand for single-family rentals, according to Goldberg at Core Spaces.
Higher interest rates could also push potential home buyers into the rental market. The rate for a 30-year, fixed-rate mortgage averaged 3.55 percent in late January 2022 — the highest rate since March 2020.
Stakeholders believe both the BTR and student markets have a bright future.
“We still see tremendous upside and opportunity in the student housing asset class and continue to actively assess and evaluate deals and management opportunities. We see BTR as a complement to our overall portfolio and are very much excited to leverage our expertise honed in both the conventional and student housing multifamily sectors.” says Lallathin at Coastal Ridge.
—Jane Adler
This article was originally published in the January/February 2022 issue of Student Housing Business magazine.