While build-to-rent (BTR) product isn’t new for AvalonBay, the real estate investment trust (REIT) announced during its third-quarter earnings call in November that it made a decision to more formally advance its plans in the sector.

Stew Royer, senior vice president, investments and structured investments, AvalonBay Communities
Stew Royer, senior vice president, investments and structured investments, AvalonBay Communities

“We consider it an expansion of our existing business. We’ve been building purpose-built townhomes really since the beginning of AvalonBay. A lot of times we’re building townhomes in conjunction with apartment flats, and sometimes we’re building townhome types of communities,” said president and CEO Benjamin Schall during the earnings call.

He added that it’s a chance to leverage AvalonBay’sstrengths in operations and development andbring that to an expanded set of opportunities.

“I think we can really bring our strategic advantages to bear there and provide more growth opportunities going forward,” he added.

MFE caught up with Stew Royer, senior vice president of investments and structured investments at AvalonBay, to hear more about the REIT’s BTR strategies in the short and long term.

What led AvalonBay to formally embrace the BTR model, and why now? How does the BTR strategy align with AvalonBay's broader portfolio goals?

AvalonBay has informally been in the BTR space for some time, and we currently operate over 3,000 townhome rentals in our portfolio. We’ve always viewed our existing townhomes as a great complementary product within the portfolio and another way to diversify our offering and grow with our residents as their needs evolve. We've recently announced a more ambitious and formal commitment to BTR but continue to see it as a natural extension of our product line that will benefit from our fully integrated development, construction, design, and operations teams. BTR is well positioned to capture demand from two of our largest demographic cohorts, millennials and baby boomers, and by expanding our BTR presence we can address those residents by doing what we already do well—providing high-quality, professionally managed rental housing.

Which markets does AvalonBay see as having the greatest potential for build-to-rent expansion?

We’ll continue to explore opportunities in all our regions but see the most growth potential in our Sun Belt markets, particularly Austin, Texas; Dallas; Charlotte and Raleigh-Durham, North Carolina; and Denver. These also represent AvalonBay’s dedicated expansion markets, and we plan to continue growing our presence in these areas via both BTR and traditional apartment communities.

Given the land requirements needed to deliver BTR homes at scale, we expect this product to be suburban and weighted toward our expansion regions. We want to be responsive and nimble to demand, so there is not a stated target in any particular market or submarket.

What are the priorities when it comes to potential BTR acquisitions?

The priorities for BTR acquisitions really mirror what we look for in all acquisitions: well-located, high-quality assets that allow us to provide a best-in-class resident experience. One of the things that makes BTR so exciting, and why we are really focused on adding BTR within our existing regions, is how well it can complement our existing apartment communities. We anticipate that by adding BTR within our existing regional portfolios we can really grow with our residents throughout their lifecycle as renters.

What factors are driving the growing demand for BTR properties, particularly in suburban markets?

One huge factor is that millennials are aging and forming households. As a result, many are searching for larger-format housing in a neighborhood setting to align with new life phases. Whether that resident is starting a family, needs some room for the dogs, is exhausted by expensive home maintenance, or just wants some flexibility in their housing, BTR helps fill a crucial gap for them between homeownership and traditional apartment rentals. Residents don’t have to worry about maintenance, but they get the additional privacy and space they’re looking for, including yards and garages.

BTR serves different customers in different phases of life. Turnover is lower, and the fundamentals of supply and demand are very attractive in this space.

What impact do you think the growth of BTR will have on the broader rental housing market?

Our efforts on BTR don’t come at the expense of for-sale or other rental unit types. We’re not buying up scattered homes; we’re pursuing purpose-built rental communities, and we will, of course, continue to develop traditional multifamily housing (wrap, mid-rise, high-rise, etc.).

What role do you see BTR playing in AvalonBay’s portfolio over the next five to 10 years?

We currently own over 90,000 apartment homes, and a couple thousand are BTR. The vast majority of what we own will remain conventional apartment communities, but we see BTR growing into a meaningful portion of our portfolio and plan to supplement that growth by investing over $1 billion into BTR through both acquisitions and development

What is in the pipeline?

We are really building a pipeline through a few different channels. You touched on acquisitions, which are always somewhat opportunistic by nature, but we believe as more institutional BTR product is delivered, acquisitions will be a productive channel for us. We will also drive growth through our extensive in-house development capabilities. Time will tell, but we estimate about two-thirds of our activity will come through our in-house development or through our Developer Funding Program (DFP).

The DFP is our program to capitalize third-party developers, and within that program we ultimately buy them out to own and operate those communities for the long term. Last year, we began our first BTR development within the DFP program, Avalon Plano, which is a 155-townhome community with attached two-car garages, private yards, smart-home technology, and other modern features and facilities.