When asked about eating at a popular restaurant, baseball great Yogi Berra said, “Nobody goes there anymore. It’s too crowded.” Housing economist Brad Hunter used the quip to describe the build-to-rent housing market over the next 24-36 months.
The seeming contradiction applies well, showing both the increasing demand for build-to-rent (BTR) homes and the market-driven hesitation for constructing more of them. The short-term outlook for this sector has investors, builders, and renters proceeding with caution. However, data on BTR’s long-term trajectory signifies a green light for growth.
So, what does this mean for property managers and investors?
Build-to-rent will present property management companies with unique challenges—and opportunities—in the years ahead. Now is the time to modify your business model to accommodate this growing portion of the housing market. Here’s a look at why and how to get ready.
What Are Build-to-Rent Homes?
Build-to-rent homes are detached units built for the purpose of long-term rentals. BTR developments cater to single families wanting the space and amenities of owning a home without the financial or maintenance burdens. BTR comprises traditional standalone homes as well as horizontal apartments/cottages, duplexes, row homes, and small-lot houses. Build-to-rent makes up 6% of the housing market, more than doubling the historical average over the last decade.
What Will the Build-to-Rent Sector Look Like in the coming months?
Rents have been rising by an average of 15-18% the last few years. But what goes up must come down. Analysts project a rent deceleration throughout much of 2023. CoreLogic’s latest rent report shows a 7.5% month-over-month gain in November 2022, which represents the slowest growth since May 2021.
The biggest driver of the rent slowdown is declining consumer confidence and uncertainty about a recession. Some economists predict unemployment to jump from 3.7% to 5.5% by year’s end.
With numbers heading in this direction, institutional investors in the BTR sector are in a holding pattern. Interest rates, high prices for building materials and labor, and inflationary pressures make investing more expensive. As a result, they are moderating capital releases to avoid overbuilding. However, the money has far from dried up. Billions earmarked for BTR are waiting for an economic rebound. This is on top of the $50 billion institutional investors injected into the single-family rental sector last year.
Bolstering BTR growth is the traditional housing market. With home prices reaching an all-time high in 2022 paired with multiple interest rate hikes, many buyers left the market altogether. BTR provides an attractive alternative.
Hunter Housing Economics projects 132,000 BTR homes produced in 2023. That marks a 135% increase from 2019. So, despite financial hardships, build-to-rent is still considered booming.
What Lies Ahead for Build-To-Rent Projects?
The negative financial indicators of 2023 likely will be short lived. In fact, economists anticipate BTR production to hit 154,000 homes in 2024 and grow through 2027 to 188,000 annual units. That means BTR would comprise nearly 17% of all homes built annually.
Driving the volume are millennials. This generation has delayed starting families from their 20s to their 30s. An anticipated baby boom in the next five years will have them searching for family-friendly housing. This demographic also is moving up in their careers which supports the rent growth investors want for projected ROIs. Further helping is the fact that the United States remains short nearly 1.5 million homes. So, even if the housing market rebounds and more buyers enter the market, a huge need for rental homes remains.
How Can Property Managers and Investors Prepare for the BTR Boom?
Institutional investors want a strong return on their BTR investments. Finding the right lessees and reducing turnover is key to profitability. For BTR homes to command higher rent and long-term renters, they must be well maintained. Yet this is harder to do in BTR homes because of some unique challenges.
- BTR homes may be scattered out across a city or region. Performing maintenance is less convenient and more time consuming.
- Concentrated BTR communities are more likely to experience defects or malfunctions simultaneously across homes, creating the potential for a large financial burden.
- BTR renters have higher expectations than multi-family renters for the condition of their home and neighborhood. They demand a high level of service from the property manager.
- Not-in-my-back-yard (NIMBY) homeowners often see BTR projects as hurting property values. Combatting this perception requires high-quality maintenance and upkeep of all BTR homes.
- The rapid growth of BTR has property managers and investors entering new markets where they do not have established vendor networks. Delays or poor home repairs increase renter turnover—which could cost thousands of dollars per unit.
One of the simplest ways to combat these challenges is with BTR warranty solutions from PWSC.
Property managers expanding into a new city or region don’t need to build a network—ours is ready to go with pre-vetted skilled contractors. Vendors make PWSC jobs a priority because we pay within 72 hours of completed work. Compare that to average pay time in construction of more than 30 days for 65% of companies.
Fast payments come with high standards. Contractors failing to meet PWSC’s service level agreement lose preferred status and access to quick pay.
PWSC’s HomePRO warranty addresses the most common renter repair needs. Research conducted with a large institutional property management company found that HomePRO covered 80% of residents’ repair requests.
PWSC can process claims for renters directly or through the property manager. The turn-key solution makes the claims process quick, uncomplicated, and effective.
Ready for the build-to-rent boom? You will be with PWSC’s BTR solutions.