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The Single-Family Rental Sector Has Grown Up, and Texas is Ripe for Opportunity

Pradera-San-Antonio

Texas is poised to become a leading market for new development of single-family rental communities. Pictured is Pradera, one of AHV Communities' projects in San Antonio that offers three- and four-bedroom residences and traditional Class A multifamily amenities.

By Mark Wolf, CEO and founder, AHV Communities

The single-family rental (SFR) sector began its institutionalization during the Global Financial Crisis when so many homeowners found themselves unable to pay their mortgages.

The mass quantity of repossessed homes was sold off on courthouse steps or at large in-person or online auctions, with mega-landlords amassing the homes and renting them out as investments. At the time, that business model was the only one widely recognized or, notably, well capitalized. However, the sector would not ultimately remain a one-trick pony.

Mark Wolf, AHV Communities

Mark Wolf, AHV Communities

Alternate visions for single-family rentals have subsequently emerged. The most widely known model, which is oftentimes incorrectly characterized today, is the purpose-built rental community. Built from the ground up and delivered as a contiguous, cohesive communities — basically the opposite of existing randomly located distressed homes purchased and leased — the purpose-built SFR community is on the rise.

Texas is currently one of the hottest states for new development of these communities. The activity is undoubtedly fueled by the ongoing in-migration of individuals and families from other states flooding into the Lone Star State in favor of lower taxes, high quality of life, friendly business climate and an overall affordable cost of living.

However, not all new communities in Texas are being built to the same quality standards, nor are they all being delivered in ideal locations or being optimally managed.

The Gold Standard

While only a handful of players are delivering purpose-built rental communities today, even fewer developers are vertically integrated and building the communities themselves. In fact, many large homebuilders are now rushing into the space, delivering homes en mass directly to investors that then take over leasing and management.

Arguably, the gold standard model for the purpose-built SFR community centers on one that is functionally integrated and where the communities are well-located, offer superb amenity packages, are professionally leased and managed onsite and are ultimately operated like a traditional apartment business.

The Investment Community

In the earlier days of the SFR sector, during the foreclosure crisis, institutional capital was quite wary of any ground-up construction opportunities.

These investors cited great potential to buy homes at huge discounts and have them rebound in price; home price appreciation (HPA) is what they called it. Most failed to recognize the legitimacy of the new ground-up, purpose-built business plan.

However, fast forward to today and the tides have dramatically turned. As The Wall Street Journal recently reported, “individuals, family offices, pension funds and Wall Street’s boldfaced names are shoveling billions of dollars into build-to-rent opportunities.”

Surging for-sale home prices and the COVID-19 pandemic’s push of so many renters out of urban centers and into suburban locations are further driving both demand for SFR homes and the capital pouring into them.

Location Matters

As is true with all real estate investments, the location of SFR communities will directly influence the level of demand for units, quality of the renters and ultimately, long term return-on-investment (ROI) and asset value.

Industry participants working to deliver SFR communities today do not appear to be equally discerning about location. They may pay the price down the line when regional employment growth wanes, supply outpaces demand, units sit empty or proper maintenance becomes financially unfeasible. All of these scenarios can contribute to degraded asset value and ROI.

Well-located SFR communities will undoubtedly capitalize on the housing needs of both of today’s largest demographic cohorts: baby boomers and millennials.

Boomers are attracted to SFR living as a downsizing option. They enjoy turning over maintenance and taxes to third-party groups and the lock-and-go lifestyle that renting provides. Millennials are often looking at SFRs as a precursor to homeownership and/or an option that gives them the space they desire in the interim.

Demand from both of these generations typically collides in key burgeoning regions that offer an attractive life balance and cost of living advantage. Major metro regions within Texas, Colorado and the Southeast are among these locations.

Deep Dive into Texas

Texas continues to draw a record number from other states. A recent U-Haul report confirms the population in Texas is booming. After calculating the growth of states by the net gain of one-way U-Haul trucks entering each state versus leaving, U-Haul gave Tennessee the No. 1 ranking, with Texas and Florida rounding out the second and third spots, respectively.

Like with most things commercial real estate, the importance of the state’s pace of in-migration as a growth driver cannot be overstated. All major metropolitan regions in Texas — Houston, Dallas-Fort Worth, San Antonio, Austin — are attracting new residents.

Even notables like Tesla CEO Elon Musk have recently made the state their new home. Musk, who recently chose Austin as the location for his $1 billion Gigafactory, said of the city, “It’s going to be the biggest boomtown that America has seen in 50 years — at least, megaboom.”

The other top three major metros in Texas are equally ideal SFR community locations. With burgeoning populations, these regions are all experiencing supply constraints for quality rental housing.

Narrowing location even further, premium markets for new Class A, amenitized SFR communities will be first-tier suburban sites in Texas rather than secondary or tertiary markets. The primary reason for this is that those secondary and tertiary markets may represent risk to newer investors who don’t fully understand the business.

Not only will quality-crafted and well-maintained rental homes in Tier 1 suburban places attract higher-quality tenants than communities placed further out, but they will also offer key rent growth potential and ROI over the long-term for investors.

 

 

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