On the one side of the line were those, including a number of Wall Street analysts, who looked askance at the decision, struggling to wrap their heads around why a pure-play home builder, especially one as back on the financial ropes as Beazer, would want to dabble in rehabbing foreclosed homes and turning them into rental units. There was skepticism about the scalability of such an operation, as well as the ultimate benefit to the builder's balance sheet.
In contrast, there were other industry stakeholders who could smell opportunity from the first mention of rental. Several of the industry's biggest players were already tinkering in loosely related side businesses, hoping to make some nice gains out of an ugly market. Both Lennar and Toll Brothers, for example, had ventured into the distressed real estate game, setting up joint ventures to buy huge portfolios of loans backing bad land deals from banks and the federal government. Similarly, a rental business could provide the financially strapped company with a much-needed additional source of steady revenue.
While it remains to be seen whether the new operation benefits Beazer's balance sheet, its creation shows that many of the industry's biggest players will need to do more than just become leaner and more efficient in home building operations to return to profitability. Demand for for-sale housing just isn't there, as the economic downturn has nearly nixed new household formation, a key driver of demand, bringing it to its slowest annual growth rate in more than 40 years. And while the job picture may have marginally improved, the nation's 9.1 percent unemployment rate, budget crisis, and debt downgrade aren't doing much to shore up consumer confidence.
At the same time, it's impossible to ignore the éclat the multifamily business is generating. All the buzz, all the excitement, all the ado, and a lot of the political and cultural compass seem to have renting, not owning, in mind. Most recently, the Obama administration was soliciting ideas on how to turn more than 250,000 foreclosed homes owned by government-backed Fannie Mae and Freddie Mac into rental homes. It may be a cyclical thing. Or not. It may be that demographics' next twist—not only among millennials but possibly also among those who are moving inexorably out of primary careers toward a next phase of life—is to shift housing preference to being freed of the deed.
So, it follows that the traditional for-sale housing business community—which largely built its name and reputation on excelling in the cash-in, cash-out single-family business—should entertain a fairly serious look at how an emerging “rentership society” could be a business opportunity. While most home builders lack some of the critical skill sets in construction, financing, and operations and management necessary to compete with major players like multifamily REITs, there are niches in the rental market that are opening up that could play to a home builder's advantage.
Beazer executives are banking that the shift is here to stay for at least long enough to reap some balance sheet benefit, choosing to up its investment in its new pre-owned home division, turning an in-house $10 million pet project into $20 million off-balance sheet joint venture. Management's got the program on an accelerated plan, with 100 homes in Phoenix and Las Vegas in its rental portfolio.
“While today's difficult new-home sales environment creates challenges for our home building business, it creates sizable opportunities for the pre-owned homes division we launched this spring,” Beazer CEO Allan Merrill said during a recent conference call with stock analysts.
Chances are Beazer isn't going to be alone in its rental venture, even though the sector remains an untraditional prospect for single-family builders in a rental market traditionally dominated by multifamily powerhouses.
THE RISE OF RENTALS There is the compelling, if yet unanswered, question hanging like a cloud over the for-sale, single-family housing industry: Can the American dream of homeownership be revived?