It's easy to get drawn into the gloom around new-home construction, but, if you look toward the horizon, chances are you'll see workers frantically trying to keep up with the demand in the build-to-rent market.
As the broader economy slows, it's impossible to ignore the factors driving a build-to-rent sector that often plays in the shadows of the much larger housing market. Demographics favor renting, there is fundamental demand as many buyers have been priced out of the housing market in the post-pandemic boom, and there's a vast undersupply of rental units.
Regardless of format, the build-to-rent sector is set to deliver 13,981 units in 2022, an 81% increase from 2021’s 7,724, according to Zonda.
That's not to say the sector isn't going to face serious challenges—along with most other business sectors—as the country teeters at the precipice of recession.
After all, build-to-rent builders are still builders and still need to spend the same money to buy materials whose costs have been driven higher by supply chain disruptions. Inflation is increasing the cost of every building aspect, from nails to salaries. And there's competition—lots of competition. And all of that is assuming all else goes perfectly, which is not a given when there are so many potential landmines around land deals, unexpected expenses, and development execution.
Before we go further, it's worth defining some build-to-rent terms. On the one hand, you have subdivisions with single-family homes geared toward typical nuclear families working their way to eventual ownership. On the other, you have horizontal apartments with detached homes and duplexes stuffed with millennials and empty nesters who are either unable or unwilling to buy for various reasons.
So, how can builders thrive in the build-to-rent sector in the coming years?
1. Know thyself. There's room for this industry to expand, but it's not for everyone.
2. New matters. What can you do to maintain the fresh feel of your homes and the community? The right amenities can make the difference between a hit and a flop.
3. Understand the consumer. Why are they looking to rent? The answers may surprise you.
4. Standardize. Why not minimize costs, especially when it allows you to present a consistent lifestyle to renters?
5. Cash flow. Plan for cyclicality. Builders pressed the "easy button" too often during the boom times. It's broken.
Picking the right location doesn't hurt, either. Phoenix is the industry's worst-kept secret, with inventory set to double. Other build-to-rent hot spots include Dallas-Fort Worth, Houston, and San Antonio in Texas; Jacksonville, Florida; Atlanta; and the Carolinas.
The scope of projects also proves that if you can build it, you can rent it. Builders have been finding success with high-end rentals, cottages, townhomes, single-family detached, horizontal apartments, 55-plus, and even "motel style" offerings.
The good news for the for-sale side of the equation is that many of those moving into these freshly painted rental units aren't there to stay. The No. 1 reason renters make the decision to rent is they can't find a location they like enough to make a permanent purchase. Another popular answer is that they are waiting in rentals until they get married and start a family. In other words, rentals do not appear to cannibalize new-home sales. The majority of these folks are renters by choice, and homeownership is the main reason they abandon their leases. Renters today, owners tomorrow.
In an industry in need of some good news, you could do worse than to put your faith in build-to-rent.