Single-Family Build To Rent Market Analysis

The Single-Family Build To Rent space (SFBTR) is on fire. It’s a good business and every builder and his brother has jumped into the market or is readying to do so. Of the three companies where I’m interviewing, two are entering the SFBTR space for the first time. A big time percentage for a business that essentially didn’t exist five years ago. As it is increasingly likely that I’ll accept a senior position with a company investing in the SFBTR market, it’s prudent to start drilling down through the SFBTR business model and do a quick and dirty analysis on the market to better understand the SFBTR model.

The popularity of the Single-Family Build To Rent space (SFBTR) is skyrocketing, at least on the supply side. Of the four companies for whom I am a finalist for a director-level or officer-level position, three are moving into the SFBTR business for the first time, and all are in Central Florida. While many national home builders have been starting up SFBTR divisions, smaller regional builders and private multifamily developers are entering the space.

As it is increasingly likely that I’ll take a strategically significant role with a company investing in the SFBTR market, it seemed prudent to determine the outlook of the Single-Family Build To Rent space. I also looked at the differences between SFBTR homes and traditional for-sale homes to better understand the SFBTR model.

While there is no obvious reason to discount the veracity of the data in this analysis, or the trends the data indicate, it is important to note that the data is from 2Q 2019. Further, with only 42,000 homes built for the SFBTR space, any trends that may be indicated with such a small sample size must be viewed skeptically.

In the near term, affordability issues caused by tremendous price increases in the for-sale market will continue to drive an increase in the number of SFBTR homes built and market share. This analysis, while quick and dirty, attempts to establish the outlook for the SFBTR space in the intermediate and long term.

SUMMARY DIFFERENCES SFBTR AND FOR-SALE NEW HOMES

  • SFBTR are smaller and have fewer bedrooms and bathrooms.
  • SFBTR are more likely to be one-story homes.
  • SFBTR are seven times more likely to be a townhouse.
  • SFBTR are located on lots that are 27% smaller than for-sale homes.
  • SFBTR are almost all wood-framed, not concrete block.
  • SFBTR are more likely to have vinyl siding, not stucco over concrete block.
  • SFBTR are more likely to have a one-car or no garage, not a two-car garage.
  • SFBTR are more likely to be built as an age-restricted neighborhood.
  • SFBTR are more likely to have a permit value < $150,000 or > $300,000.
  • SFBTR take 30 days longer to build.

HOME SIZES

SFBTR homes are smaller than typical for-sale homes. This difference manifests itself in square footage and design features. The median size of SFBTR homes was 1,500 square feet, which was a great deal smaller than the 2,419 square foot median size of for sale -builds. In fact, only 8% of SFBTR homes are 2,400 square feet or greater. SFBTR homes are also notably smaller than for-sale townhouses which are approximately 2,000 square feet.

The smaller size also drives other design differences. Fifty-two percent 52% of SFBTR homes had one or two bedrooms compared to just 6% of for-sale homes. Only 7% of SFBRF homes had more than three bedrooms. There’s also a striking difference in bathrooms, as 20% of SFBTR homes have just one full bathroom, only 4% of SFBTR homes have more than two bathrooms, and only 30% of SFBTR homes have a half-bath.

The data draws attention to entry spaces, claiming there are measurable differences in two-story foyers. I don’t believe this is a priority design element, but rather a coincidence stemming from the number of two-story homes. Conversely, fireplaces are a design element with a five-fold difference, 10% of SFBTR and 52% for traditional for-sale homes.

STRUCTURE

In addition to the difference in sizes, there are structural differences, as well. For example, 61% of SFBTR homes are one-story, compared to only 40% of for-sale homes. Interestingly, three-story homes represent the same 5% of each product type because of the prevalence of townhouses in the SFBTR space.

There is a sharp difference in building type with 77% of SFBTR built as townhouses, compared to only 11% of for-sale homes. This is the biggest difference between the two. This statistical gap is attributable to SFBTR townhouses being deliberately designed to bridge the gap between rental apartments and entry-level for-sale housing.

The overwhelming majority of both products are wood-framed, with 98% of SFBTR and 90% of for-sale built with wood frames. One notable difference is /in the use of concrete block shells. While I don’t have specific state-by-state data, this is presumably the Florida market. Nationwide, concrete block exteriors in the for-sale sector are 450% higher than in the SFBTR space.

Drilling down through SFBTR exteriors finds that 44% are vinyl siding, 28% are brick veneer, and 11% are stucco. In the for-sale space, 25% are vinyl siding, 22% are brick veneer, and 28% are stucco.

Parking is another significant difference where 25% of SFBTR homes have a one-car garage, compared to only 6% of for-sale homes, and 40% have a two-car garage, compared to 68% of the for-sale market. Outside the box are 35% of SFBTR homes with no parking, street parking, or a carport, compared to essentially zero.

LOT SIZES

Not surprisingly, SFBTR homes are built on smaller lots. The median SFBTR lot size is 6,200 square feet, compared to 8,500 square feet in for-sale homes. Further, 82% of SFBTR homes are built on lots that are 11,000 square feet or less, compared to 69% in the for-sale space.

CONSTRUCTION COST AND TIME

The building permit value of a  home in the SFBTR space (not including land) was $175,000 compared to $211,000 in the for-sale market. In fact, 40% of SFBTR homes have permit values less than $150,000, compared to only 26% of for-sale homes. However, 35% of SFBTR homes are permitted for $300,000 or more, compared to 25% of for-sale homes.

The number of stories and building permit values also drive significant differences in construction schedules, where SFBTR homes take 18% longer to build at 5.75 months, compared to 4.87 months in for-sale homes.

DECLINING MORTGAGE RATES

NAHB data suggests that declining mortgage rates will reduce rental demand in the near future, but says that SFBTR will rise in the coming years, but will continue to have a relatively small market share. Though they may continue to decline, mortgage rates cannot go low enough to help buyers accumulate the required down payment in high-cost, low-supply housing markets like Florida. In the Florida market, SFBTR homes should find escalating demand because of skyrocketing prices in the for-sale market which just reported a 23% increase in year-over-year housing prices.

UNSATISFIED DEMAND PORTENDS STRONG SFBTR MARKET

US housing markets never completely recovered from the downturn that started in 2007 with the subprime mortgage crisis. Now, after 12 consecutive years of recovery, and a booming housing market, housing starts are still only 65% of what they were in 2006. This lack of production has resulted in a housing shortage that Freddie Mac estimates at 3.8 million units with no end in sight.

As millions of adult children living with parents, the most in history re-enters the housing market, they are finding a severe shortage of inventory and historically high prices. Further, with the construction of entry-level homes at one-fifth of historical levels, millions of first-time homebuyers who find themselves priced out of buying a home will find SFBTR homes and neighborhoods to be a much more desirable choice than multifamily apartment rentals.