Why Build-to-Rent Stands Apart From Other Single-Family Rental Models

By The ArborCrowd Team
Apr 7, 2022

The single-family rental (SFR) asset class experienced remarkable growth in 2021, making it a top recipient of institutional capital during the year.

Institutional real estate companies invested more than $45 billion in the SFR market in 2021, according to John Burns Real Estate Consulting. That figure could possibly be even higher as John Burns only accounted for institutional transactions that were made public in its research. At the core of the massive uptick of institutional appetite for the asset class lies the strong demand from renters. In the fourth quarter of 2021, SFRs had occupancy of 94.8% and experienced strong rent growth of 13.5%, according to Arbor Realty Trust’s Q4 2021 SFR report.

One specific product within the SFR asset class that is witnessing spectacular growth is build-to-rent (BTR), which are communities of single-family homes that have been purposely developed for rent instead of for sale. BTR construction starts were a record 47,000 units in the third quarter of 2021, an increase of 17.5% from the previous year, the Arbor SFR report indicated, citing U.S. Census Bureau data. (BTR construction starts may have potentially been higher than the reported Census data, as Chandan Economics explained.)

The BTR model is becoming a popular method of SFR investment for institutional companies, because of high renter demand to live in homes and the proven financial viability of the asset class.

How Build-to-Rent Stands Out from Other SFR Investment Models

Investors have long been purchasing existing individual homes to enter the SFR market. Investors looking to scale also buy large quantities of individual homes for rent throughout a neighborhood — known as scattered-site portfolios.

In fact, investors have purchased a record amount of available single-family homes in 2021, according to Redfin. In the fourth quarter of 2021, investors acquired 80,293 homes, up 43.9% from 55,812 homes a year earlier. The acquisitions totaled $49.9 billion, which increased from $35 billion in Q4 2020. (Redfin’s definition of investor includes institutional as well as non-institutional entities.)

BTR communities have a few distinctions compared to acquiring individual homes or scattered-site portfolios, including:

  • Adding new inventory to an area, helping to meet the demand for housing, and potentially leading to more affordable housing
  • Utilizing raw land in undeveloped areas, especially in secondary markets with strong real estate fundamentals, to create housing and fuel market growth
  • Professionally run community-like settings with amenities, often including pools, fitness centers, clubhouses, and playgrounds
  • Greater marketability for an investment exit

Why Are BTR Communities Growing Robustly?

BTR communities are not a recent innovation of the multifamily rental market — as many headlines have expressed. In reality, this model has existed in mostly suburban areas for decades as evidenced by older vintage SFR communities existing today across the country. However, the BTR model (and SFR assets as a whole) gained attention within the past decade as people began searching for more spacious and affordable housing relative to urban centers.

The demand exploded during the COVID-19 pandemic, which amplified certain trends such as increasing remote working, a migration to the Sun Belt region, and rising home prices. Additionally, the start of household formation among aging millennials bolstered the demand for homes.

However, the high demand and a national shortage of homes drove prices to record highs. Many renters who desired a home but could not obtain one — either due to a lack of inventory or affordability — turned to SFRs as the solution. According to a recent RentCafe survey of 3,300 renters, 78% were interested in living in an SFR community.

In the next several years, millennials, currently the largest generation by population, are expected to increase household formation significantly, driving continued demand of BTR communities. As the housing shortage is likely to persist for the foreseeable future, BTRs provide a way for institutional investors to add to the inventory and meet the demand, leading to further growth for the asset class.

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