Monday Oct 02, 2023

How Companies Can Capitalize On Build-To-Rent

CEO of SmartRent, an enterprise smart home and smart building technology platform for property owners, managers and residents.

When I started working in the single-family rental (SFR) industry more than a decade ago, many in the real estate world were skeptical about whether it could be a lucrative business.

But with the SFR market valued at approximately $3.4 trillion today and climbing (poised to outpace multifamily by some estimates), it’s clear this is a business that is here to stay. Timing, market trends and even crises needed to converge to get the market to the point where it is today. The mortgage crisis and mobile technology fueled the possibility of procuring and managing single-family homes from an institutional level. The rise of remote work and pandemic-driven preferences for more space only accentuated this trajectory.

As SFR demand grew, the need for more units and homes spurred evolution in the sector, which brings us to where we are now; rather than buying swaths of land to develop for-sale homes, builders are opting to develop communities designed to rent. Build-to-rent (BTR) communities, which are essentially multifamily communities with more space and without shared walls, are becoming increasingly popular. Builders, operators and investors are enthusiastically pouring billions of dollars into development.

Here’s why BTR is experiencing exponential growth, why we’ll continue to see people invest in the space and what leaders should keep in mind as they look toward opportunities in this industry.

Keeping Pace With Millennial-Driven Demand

The benefits of these new communities for renters are clear. Millennials and young families who are flocking to suburbs in search of more space and yards are driving the bulk of demand. Some millennials, despite having the wherewithal to purchase property, choose to rent for the flexibility it affords; others plan to build equity through homeownership later in life but want the single-family home lifestyle in the interim. BTR communities are also appealing for downsizing baby boomers who gravitate toward the advantages of a professional maintenance team, luxurious on-site amenities and the privacy of a single-family home.

Despite so much action in this space, I don’t think the demand will fizzle or slow down anytime soon; these markets are still vastly underserved, and the current housing stock still doesn’t stack up against demand. Vacancies are the lowest they’ve been in 25 years; one recent study highlighted the urgent need for more family-oriented rental housing in particular.

This growth means the biggest questions in the industry are no longer about whether SFR or BTR is worth the investment, they are about where to develop homes, how to provide adequate property management capabilities and what areas to refocus on from a corporate level.

Considerations For Getting Involved In BTR

While these homes generally experience little turnover, owners and operators still benefit from the ability to invest in and update units to capitalize on increasing rents and market demands.

In evaluating this opportunity, investors and leaders should consider:

• Demographics: BTR attracts renters in several demographics, and properties should cater to segments within that by thoughtfully picking amenities and layouts that attract targeted markets. For example, dog owners are a surprisingly significant market segment for BTR homes; people who would normally live in multifamily buildings opt for places that have small yards. To reach this market, some communities are adding dog runs, pet washing facilities and small fenced-in yards.

• Location: BTR is booming in metro areas in the Sun Belt, particularly in the Phoenix area and other corners of the country that are popular for real estate beta testing. Operators and investors are drawn to areas where people will put down roots or stay put; we’re seeing BTR activity occur in places that meet these criteria where enough land is available to develop and the job market is strong.

• Technology: While many multifamily properties are involved in a technology arms race as they develop co-working spaces and other amenities to accommodate remote workers, implementing technology into a community of stand-alone homes isn’t as straightforward. Similarly, homebuilding companies don’t necessarily have the existing technology infrastructure in place to manage the property maintenance, staff, tours and other tasks.

Looking forward, we’ll see BTR get even bigger, especially with the backdrop of the red-hot housing market putting homeownership on hold for many. The industry has radically evolved since the humble beginnings of SFR at scale, and there’s no question that if leaders carefully consider factors like demographics, location and technology, they can find success in this sector.

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