Townhouses comprised 12.4% of all single-family starts in 2017.
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With the high cost of homeownership, elevated interest rates, and limited housing inventory, the build-to-rent (BTR) sector remains an option for diversification and revenue stream opportunity for small- and mid-sized builders.

During “Now’s the Time for Small and Mid-Sized Builders to Capitalize on Build-for-Rent” at the 2024 International Builders’ Show, panelists John Hunt, Mark Konter, and Lamar Smith highlighted the opportunity, attractiveness, and feasibility to moving into the BTR space.

“[Institutional investors] have backed off the BTR space, which is giving opportunities for [builders] who want to try and get into the space. We don’t have enough inventory after 15 years of underdeveloping and underbuilding. We need more inventory,” Hunt, chief analyst and principal at MarketNsight, said during the panel.

While the frenzy of interest in the BTR sector has cooled as interest rates and cap rates have increased, the sector has doubled in size since 2020. Hunt highlighted how similar principles surrounding pricing and evaluation can help operators navigate the landscape. While resale inventory sets the pricing market in the single-family for-sale sector, Hunt said existing rental inventory sets the pricing market for BTR, and newly built rental housing has the ability to price higher than traditional apartment living.

“There are a lot of reasons why individuals rent [instead of] own. There is not the stigma on renting that there used to be,” Hunt said. “Renting has become a much more prevalent option. We are all living longer, we are all active longer, [and] the convenience and flexibility of renting is your equity.”

In addition to housing market dynamics supporting the attractiveness of BTR, Hunt said demographics also are supporting the runway. The rental product can appeal to both baby boomers and millennials, the two largest groups with housing demand. The BTR product type can serve as a replacement for entry-level homes (millennial buyers) and move-down/retirement homes (baby boomers), according to Hunt.

During the panel, both Konter and Smith highlighted how the sector has become a key area of diversification for their respective companies.

“The BTR sector has changed a lot since 2022 because of cap rates and interest rates. That doesn’t mean having rentals because you are a builder doesn’t make a lot of sense,” Smith of Smith Family Homes said during the panel. “[It is appealing] for these reasons: amortization, depreciation, and appreciation.”

Konter, principal of The Konter Cos., discussed the opportunities present for single-family builders and highlighted that multifamily product types such as townhomes can be an ideal entry into the sector.

The advantage of the townhome product type, in particular, for single-family builders is it allows companies to leverage existing trade partners and supplier relationships to build a product type “not substantially different” in look or feel than a single-family detached home. In addition, it is easier to obtain zoning approval for townhome construction, Konter said, a major advantage relative to other multifamily product types.

“If you are a local builder, you know your market better than the large multifamily developers. [You can] figure out and cater to the underserved portion of the market,” Konter said. “You can also create a market-differentiated product and [think] what you can do that can be a little different to help drive clients to rent as opposed to rent from someplace else.”

With inventory and affordability concerns unlikely to dissipate, the panelists reiterated that demand for BTR is unlikely to wane. The product type can help diversify a builder’s portfolio, mitigate risk, and provide a long-term income stream into the future.

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