Single-Family Build-to-Rent Special Report: Poised to Thrive in the Next Cycle
As 2022 comes to a close, the economy and real estate markets face more uncertainty than at any point since the COVID-19 outbreak. Elevated demand and a persistent shortage of housing created a supply-demand imbalance across both the rental and for sale housing markets for the past few years, driving rapid price and rent growth across the country. The financing climate contributed to the frenzy, with low mortgage rates supporting steep rises in for-sale housing prices and significant cap rate compression for investment real estate.
While the economic picture has dimmed as the year has progressed, the short- and medium-term outlooks for single-family build-to-rent properties have remained attractive. Renter demand for these homes is being fueled by demographic trends as millennials age and their housing needs change. Further, a still-healthy labor market will continue to drive new household formation. With a more uncertain outlook in the overall economy, lenders and investors are expected to favor less risky assets. Single-family rental communities, which often have high-wage renters and low turnover, should stand out in the current economic climate.
Report Highlights:
- For housing markets, rising interest rates fueled by lingering inflation pressures are weighing on demand and pricing. New and existing home sales prices have begun to inch lower and rental rates in most markets have leveled off.
- The U.S. labor market has rebounded and even surpassed pre-pandemic levels, but this growth is expected to slow going forward, along with nearly every other economic indicator.
- Home ownership has been severely restricted by the steep rise in mortgage rates. The average 30-year, fixed-rate mortgage began the year at around 3.1% and has trended higher nearly every month, topping 7% in October. This heightens the demand for build-to-rent.
- Now that the build-to-rent business model has proven popular with renters and investors, developers have begun bringing larger properties to the market. The median price has spiked nearly 25% in 2022 to about $380,000 per unit.
- The current debt & equity climate shows clear differences from last year, with debt funds active in the non-recourse placing less capital and preferred equity groups targeting lower loan-to-cost ratios. Still, construction financing for build-to-rent may remain in demand over the next few years.
- Current renters looking to purchase first homes will likely need to wait until mortgage rates decline or housing prices lower. This lag will continue to support demand for single-family rentals.