There will continue to be demand for rental communities even as millennials age into prime home-buying years and the homeownership rate rises. These communities can range from highly amenitized and institutionally managed to single-family homes. Mom and pop investors have known the value of single-family rental homes for decades, but the build-to-rent (BTR) asset class is one of the fastest growing in residential real estate. I recently sat down with Tim Sullivan, Zonda’s senior managing principal, to discuss the growing popularity of the space.
BUILDER: Can you talk us through the evolution of this product type?
Sullivan: The first stake in the sand came from the REITs in the wake of the Great Recession. Government officials were looking for a solution to the foreclosure crisis and decided to try incentivizing investors. The plan worked, and investors shelled out billions to buy homes below replacement cost to then rent to consumers. But maintenance was inefficient because the homes were rarely clustered together, so the companies got smart and realized by building new in one location, they could get economies of scale while still supplying a single-family rental product.
BUILDER: Did the product stay the same along the way?
Sullivan: Yes and no. There are two main types of BTR products, and one is a traditional single-family home. An important factor for BTR is how the homes are mapped; the single-family homes are fee simple in platted lot subdivisions. This product type gives flexibility to the owners because some or all of the units can be sold, if desired, at a later time. These homes typically offer three to four bedrooms and outside space in a lower-density configuration. But the institutions realized not everyone needs that much space. Enter: horizontal apartments. For institutional investors, this product type is relatable because it’s basically just an apartment pulled apart. These apartments are on one common map and can’t be sold separately. The earlier mentioned economies of scale also apply here. Horizontal apartments act as an apartment replacement by offering renters primarily one- and two-bedroom options with small yards in a relatively dense environment. These apartments are also accidental COVID hedges as they’re not stacked.
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