Build-for-rent (BFR) communities were performing well pre-COVID-19 and momentum in the sector has continued to pick up at impressive speed. To discuss growing trends and predictions on how this appealing investment will evolve over the next several years, we sat down with Dori Nolan, Senior Vice President of Client Services, Mark Forrester, Senior Managing Director and Russ Hardy, Managing Director. Dori works close with Berkadia Institutional clients looking to break into, or expand their presence, in the space. Mark and Russ are members of Berkadia Investment Sales and actively engaged with clients in the acquisition and disposition of these properties.
What’s the current appeal of BFR and single-family rentals (SFR)?
DN: The concept of BFR and SFR isn’t new, but its appeal to cross-section investors is a recent development over the last few years. The functionality of the units, the shift from more urban to suburban lifestyles, affordability—all these factors are benefits to renting as it provides a certain style of living. Some of these BFR/SFR homes offer yards, garages, more space, and a better environment to work from home in a remote environment.
RH: BFR and SFR properties have become increasingly popular as both ends of the demographic spectrum, millennials and baby boomers, are seeking the hassle-free living of apartment life, while also looking for the space and privacy of a single-family home. They offer more close-knit communities that a traditional rental apartment may not have with tenants rotating in and out.
We saw a shift in lifestyle—a suburban renaissance—pre-COVID-19, as the millennial generation began aging, getting married, building families, etc. COVID-19 accelerated this trend and has added to the appetite for suburban living that we’re seeing.
MF: BFR communities were performing very well pre-COVID in the Southwest, where my team does a lot of work, so it’s not surprising that they have gained even more momentum since the pandemic, with residents preferring the suburban locations BFR occupies. Similarly, institutional investors were beginning to seriously investigate BFR pre-COVID and are now much more focused on entering the space, viewing BFR as an asset class that’s here to stay.
Which markets are you seeing a boom in for BFR properties?
DN: BFR as a sector is averaging 95 percent occupancy, proving how resilient the housing market is. Right now, we’re seeing BFR markets in regions where there is available land, like Arizona, Florida, Texas, Louisiana, and the Atlanta region.
MF: I agree, the BFR market is seeing the largest booms in the Sun Belt and Southeast markets, along with national suburban areas that allow for the lower densities of BFR properties. BFR is a lifestyle choice for residents who may be looking for many of the advantages of living in a home, but without the obligations that accompany home ownership. If you were to compare BFR next to “traditional” apartments, the biggest differentiator is lifestyle. In areas like Arizona, BFR normally doesn’t compete with traditional apartments or vice versa, but rather expands the overall market for tenants. However, in some instances where there may be oversupply, BFR can be seen as a direct competition to traditional apartments as traditional units seek to rebound from COVID-19 losses in the short term.
RH: In the Southeast, where my team is very active, we are seeing development in many of the major primary markets, but also in secondary markets like Huntsville and Knoxville. Many BFR communities are under development and the ones that have come online are leasing at record pace. As this is a newer product type in the region, BFR properties typically are competing, or pulling tenants away, from nearby traditional apartments.
Has the buyer pool for BFR offerings increased?
DN: Previously, it was mainly private investors in the BFR space. Up until a few years ago, BFR/SFR was a largely a more private, mom-and-pop type of strategy until the financial crisis, when larger institutions started buying single family homes at distressed prices or homes out of foreclosure. But today, many institutional investors, family offices, and exchange buyers are now underwriting to acquire BFR properties.
MF: When it comes to what makes investing into single-family-rentals more attractive than apartments, there are several factors at play. SFR/BFR properties normally have higher rents, lower operating expenses, lower turnover, multiple financing sources (unless it’s a bifurcated community), high availability of professional management (just like for traditional apartments), and ability to sell at the same cap rates as traditional apartments. With these factors in consideration, institutional investors are now quite interested in BFR as a portion of their multifamily portfolio.
RH: Investors are chasing the same level of returns as they would in multifamily housing. Cap rates are one of the prevailing metrics and tend to be similar in SFR communities as to a neighboring apartment complex.
How will BFR properties evolve over the next several years?
DN: Housing has always been viewed as an inflation hedge, resilient and a great way to produce attractive risk-adjusted returns . BFR properties have become a niche strategy for investors to invest and deploy capital in the housing sector, similar to what we’ve seen with student housing and seniors housing. It’s a viable and long-term strategy that investors should consider. BFR/SFR properties will become equally as prevalent as multifamily housing in the next 5 to 10 years.
RH: Where owning a home was once the goal, we’re now seeing a greater amount of people looking to rent. What we’re seeing in these purpose-built BFR communities is that rent is actually higher. But people are choosing to rent because they want the convenience of having a home, but not the responsibility of maintaining it. This isn’t a discount to a mortgage, it’s a choice.
MF: There’s an increasing variety in the buyer pool reviewing our BFR offerings, not just the private investors we once saw. Increasing single family housing prices—the average single family home price in Metro Phoenix has increased from $300,000 to $400,000 over the past year—has led to a desire for flexibility in renting a home with professional onsite management, privacy, the ability to have pets with pet amenities, the ability to lock and leave…the list goes on. For all of these reasons, we expect the buyer pool to continue expanding and see an increase with the number of tenants seeking out BFR.