By Alison Rice. Compared to homeowners, renters often are treated as second-class citizens. According to the conventional wisdom, they're not as stable. They don't make as much money. They don't care as much about their neighborhoods.

To a handful of builders, though, those renters -- and their apartments -- are revenue. Others see them as a strategic advantage in land development and mixed-use communities. "In the larger developments, having multifamily makes sense," says Dan Fulton, president of Weyerhaeuser Real Estate Co. in Federal Way, Wash., which started 518 rental units last year. "The community wants it, and we want it."

While it's true that multifamily vacancies are currently up, such diversification may also provide a cushion against mortgage rate hikes that could affect the single-family market. "You're basically covering all your bases, regardless of the interest rate," says Sharon Dworkin Bell, senior staff vice president for multifamily at the NAHB.

More renters?

Since the release of the 2000 Census, demographers have been touting the potential boon to housing: increasing numbers of immigrants, baby boomers, and their children, the "echo boomers."

But before immigrants and echo boomers can buy single-family homes, they'll need to rent.

"Clearly, there's an opportunity there [for builders]," says Mark Obrinsky, vice president of research and chief economist for the National Multi Housing Council in Washington. "By the end of the decade, there will be 1.5 million more households in the 20 to 30 age group than at the [decade's] start, and it's a heavily rental group." So are immigrants, who have lower homeownership rates than naturalized citizens.

Then there are the boomers. "They're mostly homeowners," Obrinsky acknowledges, but those that aren't represent a small but significant slice of the rental market. Of the 14.1 million empty-nest baby boomers in the United States, 9.4 percent rent rather than own their homes. And, with the children gone and incomes high, these renters can afford to spend more on housing. "That's what is fueling demand for condos and upscale apartments," Obrinsky says.

That luxury-oriented trend will probably change as the echo boomers and immigrants begin to rent, though; they won't be able to afford such pricey digs, making entry-level apartments hot properties. "But with the numbers that are coming online -- 1.5 million more potential renters -- there may not be enough" existing apartment buildings in that category, Obrinsky says. "We may see a lot more building in that area."

Multiple motivationsCross-marketing. Builders can capture new buyers, often by offering a financial incentive. With The Drees Co., renters can earn $100 to $150 monthly toward a down payment, to a maximum of $4,500 for a $250,000 home. Builders may also discover market niches that they couldn't otherwise serve. In California, for instance, Weyerhaeuser subsidiary Pardee Homes has seen its apartments go to aging parents who want to live near adult children. Other business comes from Pardee's buyers-turned-renters who want to stay in the neighborhood without the hassles of home maintenance.

Revenue. Last year, The Drees Co. did $16 million in apartment construction -- roughly 2 percent of the builder's total sales. It garnered another $1 million in income from managing its 2,200 apartments in the Cincinnati area. Those units typically are owned not by the builder, but by family limited partnerships and other investors.

"It's not a windfall," admits Ralph Drees, chairman of The Drees Co., based in Fort Mitchell, Ky. "If you get enough units, it's pretty nice."

But Drees' approach may only be an option for private builders. Because of accounting and other issues, owning and managing apartments makes little sense for public home builders, who typically build and sell their multifamily projects to investors. Margins tend to run about the same as single-family home building, according to builders who do both.

Permitting. Another benefit may come in land buys, as builders find themselves able to bid on and build out parcels zoned for single-family and rental housing. The ability to offer multifamily product may also help with local zoning authorities. If civic leaders worry about high housing costs, builders could ease affordability fears by adding rentals to their plans. Finally, builders could convert these captive renters into buyers through incentive programs.

It makes sense. But that doesn't mean it's easy, even for big builders. "Home building has a quick turn and a quick cycle time. Apartments have long cycle times and low turns," says Tim Eller, chairman of Centex Homes. "Home building is a different model." Hoping to gain land and operational efficiencies, the Dallas-based company has been experimenting with joint rental and for-sale projects in Minnesota and Florida. "The jury's still out," Eller says.

Lawsuit armor. On the West Coast, juries are exactly what builders are concerned about -- and what's making them do rentals rather than for-sale units within their developments. "In today's litigious environment, we choose not to build these as condos," Weyerhaeuser's Fulton explains. "This fills in the low end of our communities -- it's just that it's a rental component rather than a for-sale component."

But low end doesn't mean low quality. Pardee designs its Southern California garden-style apartments more like condos than the typical rental, with more square footage, direct access to private garages, and the same aesthetics as the surrounding upscale for-sale housing.

That's because Pardee sees its apartment residents as prime home-buying prospects. "It would be foolish to do anything other than high quality, because it sets the tone for buyers to step up to other lines," says Hal Struck, Pardee's executive vice president. "If they feel their apartment was not high quality, you've tainted them for the rest of their buying life."

Published in BIG BUILDER Magazine, July 2002