Some of the nation’s largest single-family homebuilders are seeking a new title: landlord.
Residential real estate giants including D.R. Horton, Lennar Corp. and Toll Brothers are planning to use the massive scale they’ve built from decades of constructing homes for sale to jump into the fast-growing single-family rental home industry. The business has long been dominated by mom-and-pop investors with fewer than 10 homes in their portfolios, but lately it’s been drawing interest from institutional investors.
“The single-family rental and, in particular, single-family build-to-rent segment is evolving into an institutional asset class,” said Frederick Cooper, a senior vice president at Toll Brothers, in an interview with CoStar News. “The appeal of suburban living has been highlighted, in particular, during the pandemic.”
The single-family rental market, particularly the portion centered on entire neighborhoods made up of homes built to rent, is the focus of more and more companies forming groups to develop rentals and the platforms to serve them. These companies are looking to take advantage of limited U.S. housing supply that is contributing to increased rents, renewals and numbers of renters as single-family home prices reach record highs.
“It’s another asset class that plays to our skills,” Cooper said. “We’re very good at finding land and we’re very good at building homes and getting approval. It’s an opportunity to grow the company.”
Single-family rental homes cater to a rapidly expanding residential demographic of young professionals, couples and families who want the advantages of a home without the mortgage, down payment, homeowner expenses and permanence that come with buying a house. They have become more popular, particularly during the pandemic, as renters want more privacy, less communal space, the convenience of professional property management and amenities associated with new homes.
“All the national developers are either in the space already or getting into” the single-family rental market, said Zach Nolan, a senior director with JLL in Tampa, Florida, in an interview.
And that demand is being seen beyond just homebuilders. Businesses and investors bought at least 67,943 existing homes in the country’s largest cities in the second quarter, the biggest quarterly figure on record and a more than 15% increase from the prior quarter, online real estate brokerage Redfin said.
As with any investment, there are risks. As more homebuilders enter the single-family rental home business, questions remain as to whether they will like being landlords or hire a third-party company to manage the homes. There’s also a question of resale values, whether the appeal of renting could peter out, and if supply chain issues might lead to a drop in profits.
Even so, builders are attracted to a market in which record-low housing inventory has led to sky-high prices for single-family homes, creating affordability issues for some cost-burdened potential buyers born between 1981 and 1996. These millennials are often saddled by student loan debt as they look to buy a home.
“Housing affordability challenges are keeping many households, especially first timers, out of the for-sale market,” according to a report on single-family rental homes from Washington, D.C.-based real estate consultancy RCLCO Real Estate Advisors.
Roots in Great Recession
The U.S. single-family rental market got its start as a response to the vulnerable housing market after the Great Recession. Individual investors bought foreclosed homes in a given city, then leased them and managed the homes as a portfolio. This model, known as scatter-site single-family rentals, is much more common than the single-family rental home developments spanning whole neighborhoods that homebuilders are planning.
Just like lab facilities or assisted-living communities, scatter-site properties could be regarded as a specialized kind of real estate. Successful scatter-site companies must have massive amounts of scale to manage a portfolio that can span an entire metropolitan area.
“That operation is extremely logically complex, in terms of meeting tenants, fixing something that breaks, or knowing what the rents need to be in these different micro locations that have nothing to do with each other,” Chris Shea, a managing director with JLL in New York City, said in an interview. “It requires technology and logistical investments of a scale that very few people in the world have.”
Maintaining single-family rental properties is much more demanding than maintaining an apartment. The average single-family housing unit spans 1,291 square feet, about 45% larger than the average multifamily unit’s 811 square feet, according to Freddie Mac. And managers need to have a deep network they can call on of nearly every kind of utility worker — from plumbers to electricians — to manage rental portfolios that may span the length of a city, state or regional area.
That kind of scale draws in large investors that can throw seemingly unlimited amounts of cash and resources at their investment. More institutional investors are expanding their single-family rental home portfolios, including Blackstone Group, Brookfield Asset Management and JPMorgan Asset Management.
So the odds are stacked against a smaller, newer entrant to the industry building up the resources necessary to succeed.
“Unless you’re one of those larger groups that already has scale, it’s very challenging for new entrants to come into the space,” JLL’s Nolan said.
D.R. Horton, the largest U.S. homebuilder by revenue and closings in 2020, is opening its first single-family rental neighborhood through its subsidiary DHI Residential. The Charlotte, North Carolina, neighborhood is near the University of North Carolina at Charlotte and features homes with chef-inspired kitchens and smart home technology. Ranging between 1,360 square feet and 2,368 square feet, those homes have rents starting at $1,745 per month.
Lennar Corp., the nation’s second-largest homebuilder, entered the market earlier this year when it formed Upward America Venture to buy more than $4 billion of new single-family homes and townhouses built by Lennar and potentially other homebuilders. The initial investment of $1.25 billion came from Centerbridge and Allianz Real Estate. Lennar formed a new subsidiary called LennarSFR to manage Upward America Venture.
It “provides a unique opportunity for families and individuals across the country to live in brand-new Lennar homes at an attainable price point, all without putting up a down payment,” Rick Beckwitt, co-CEO and co-president of Lennar Corp., said about the venture on the company’s first-quarter earnings call.
Toll Brothers has a joint venture with BB Living, an apartment developer and operator, that develops and manages luxury single-family rentals with amenities in areas with good school districts. Toll Brothers builds the single-family rentals, and BB Living manages the properties, Cooper said.
For Toll Brothers, developing single-family rental homes as a joint venture with BB Living is a long-term partnership, he said.
“That’s kind of the path that we’re on for the foreseeable future,” Cooper told CoStar News.
The venture opened its first neighborhood, called Las Casas at Windrose, in a suburb of Phoenix, with rents between $1,900 and $2,200 per month. It is planning to develop more than 20 rental neighborhoods in Texas, Florida and Utah.
Haven Realty Capital, one of the first companies in the single-family rental sector, got its start in 2009 when Sudha Reddy bought a house in Riverside County, California, for $70,000. Reddy estimates the house would have been worth $350,000 before the 2008 financial crash.
“It started as an experiment,” said Reddy, founder and managing principal of Haven Realty Capital. “It was a very scary time back then. The sky was falling. The markets were in free fall, both the housing and the stock markets, so being able to convince capital you wanted to buy houses at foreclosure was not easy.”
He financed the deal with funds and loans from friends and family. The nation was finally coming out of the other side of the Great Recession, which devastated the U.S. housing market and left millions of Americans leery of buying a house again. Still, financial institutions and banks weren’t about to issue loans for developers in an experimental, unproven real estate type.
“Back then, there was really no financing available,” Reddy said. “You had to basically prove to banks there was a business here.”
That narrative began to shift several years ago, as more developers proved the viability of single-family rental homes. And as major companies announced their own plans to invest millions of dollars into the sector, banks and lending institutions began to have more confidence in the long-term prospects of single-family rentals.
“You had very few people in the space, but also very few equity funds,” Mike Clow, executive director at Greystar, said in an interview. “So, now, you have these big players, which I’m sure makes the small developer nervous. It legitimizes the space.”
Greystar, one of the largest apartment developers in the United States, owns and manages more than 1,000 single-family rental homes throughout the country at 14 existing single-family rental neighborhoods and another 15 that are under construction, Clow said.
Can It Last?
Despite the flurry of demand and investor interest, in its bigger form the single-family rental industry is relatively new. Having only gained traction in the past decade, some investors and developers are questioning if it will become a new housing sector or something that will fizzle off in a few years.
“I think we’re trying to figure this out: Is it a fad, or is it a product line that’s going to be around?” Clow said.
Given the events that led to the surge in single-family rentals in the form of a housing crisis mainly, alongside a generational increase in student loan debt, it’s unlikely that the industry is going to lose popularity anytime soon. Still, some developers aren’t rushing in just yet.
“We are watching from the sidelines, if you will, to see how it plays out,” Steven DeFrancis, founder and CEO of Atlanta-based apartment developer Cortland, said during a panel Marcus & Millichap hosted earlier this year.
But for most of the existing, longtime single-family rental developers, the increase in institutional investors and builders is considered a necessary step that the industry needed to take to be legitimized. And even if the larger firms represent more competition, they also signal to investors that the industry is big enough and promising enough to be taken seriously.
“More competition in the market, oftentimes, is a good thing,” said Jacque Petroulakis, executive vice president of marketing at NexMetro Communities, a developer of luxury leased-home neighborhoods founded in 2012.
For Reddy with Haven Capital, business has continued to boom since the Great Recession. Even at the time, the property type made logical sense, filled several housing niches and catered to empty nesters, regional transplants or young families, demographics that hadn’t historically been targeted for rental homes.
“There was a moment in time when we all looked at each other and said, ‘There’s a really good chance there’s going to be a segment of renters that are renters by choice,’” Reddy said. “They want to rent, they want flexibility. We felt there was a long-term business plan.”
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