The past few years have seen a surge in interest in single-family rental (SFR) and build-for-rent (BFR) spaces in commercial real estate. Traditionally the domain of small- and medium-sized investors, the SFR/BFR space has begun to attract institutional investors. BFR, in particular, can often offer higher occupancy levels and rents while promising lower capital and operating costs than traditional multifamily housing.
Keaton Merrell, managing director, Capital Markets, Walker & Dunlop, spoke to REBusinessOnline about debt and equity in BFR, as well what to know when it comes to agency involvement.
First, Merrell briefly clarifies the terminology: “Oftentimes, people use SFR and BFR interchangeably. They are two totally separate asset classes and are looked at differently by capital. SFR is defined as a cluster of homes in various geographies that are pooled together for investment purposes. BFR is purpose-built housing within contiguous rental communities, much like traditional multifamily properties.”
For a more in-depth look at the SFR and BFR in general, read more on the asset class here.
REBusinessOnline: What is the current state of debt and equity capital in the market when it comes to BFR?
Merrell: I will start with equity and then move on to debt. The equity that is coming into the space is mind blowing. We get calls daily from new groups that want to invest equity into the BFR space. Most equity groups are looking for programmatic equity whereby they can invest in multiple BFR projects. For the most part, equity terms resemble what we are seeing in traditional multifamily terms.
As it relates to permanent debt, both of the agencies (Fannie Mae and Freddie Mac) will finance BFR as long as it is contiguous, purpose-built housing for rent. They will finance all forms of BFR. Some life companies are also entering into the space now with permanent financing. Construction and bridge at certificate of occupancy financing is very active in the BFR space. For the larger, more institutional sponsors with big pipelines, there is plenty of debt. For the middle-market and smaller operators with smaller BFR projects, debt is harder to come by. Not enough banks are in the space, but that is changing as more groups become educated about the sector.
REBusinessOnline: What do sponsors need to know about this space?
Merrell: Do your research. BFR is still a relatively new asset class and there aren’t a ton of comps. There are some great research firms that can do a market study to evaluate your floor plans, rents, etc. Involve lenders like myself early so that we can see how your project is laid out and are able to spot any challenges, addressing them early. Having vetted a project early and having conducted a market study that you can share with a lender is critical.
REBusinessOnline: How does Walker & Dunlop approach agencies when involving them in these projects?
Merrell: We take a “work backwards” approach when considering all BFR deals. What I mean by that is that we want to really dig into each BFR deal and make sure that it will be a fit for both Fannie Mae and Freddie Mac. Every BFR deal has its own nuances, and we want to make sure that an agency takeout will be there for the project once it is stabilized. When we go to construction or bridge lenders at the time the certificate of occupancy is official, we want to show them that there is a takeout loan once the deal is stabilized. Other lenders will do takeout financing on BFR. However, the agencies were still in business during the great financial crisis and early COVID, while other lenders stopped lending for a period of time.
REBusinessOnline: Why are middle-market and smaller lenders hesitant to become involved with BFR?
Merrell: This is a great question and something that is a head-scratcher to me. I took a BFR deal to market in early COVID and all the banks passed on it. They wanted to wanted to “stay in their lane” and stick to multifamily. BFR space, while single story, is still multifamily. Oftentimes, it underwrites better than traditional multifamily with lower expense ratios, amazing resident retention and higher rents. It is multifamily — as evidenced by the fact that both Fannie Mae and Freddie Mac will finance the projects at stabilization. I think as more lenders become educated about the sector, they will storm into the space in the same way that equity has charged into the space. We have worked on some BFR deals that have been 100 percent occupied for over two years and have a waiting list of residents wanting to move in. What is not to like about that?
REBusinessOnline: Can you talk about some of the misconceptions associated with the BFR space?
In addition to the SFR/BFR term confusion mentioned earlier, another misconception is that the agencies will only finance BFR if they are a single plat versus a multiple plat property. This is not the case; we financed a deal in Nashville late last year that was multiple plats.
See the full Walker & Dunlop team announcement on the BFR arena here.
To learn more about Walker & Dunlop’s view on the BFR market, including information on lending, capital brokerage or investment sales opportunities, download their whitepaper.