Single Family Homes built new and specifically for rent (SFR) has recently seen significant growth as both a housing product and an industry.
We are at a critical tipping point in our industry. Over the next several years, we’ll experience a period of rapid growth, adaptation, and innovation benefitting both the SFR industry and also impacting the way the industry operates and evolves in both for rent and for sale (SFS) markets.
The net result will be both an opportunity and threat for existing players in both industries and the evolution of new and more productive business models, partnerships, and capital opportunities.
4 Key Observations:
We believe that the SFR industry will be a key element in the improvement of the productivity of the overall housing industry in the United States and will be an important driver in the improvement in housing availability and affordability in the country.
Photo: Rick Dalton, Dalton Communites, specializing in Build to Rent, leads the Housing Innovation Alliance Community on a tour...
This article includes insights captured from ongoing conversations with our Community. Over the past few months, we’ve conducted one-on-one interviews and hosted a number of thought leadership panels to further define the impact of this new segment on the future of homebuilding. We’ll continue this conversation at our upcoming Housing Innovation Summit (Nov.2020) through a single-family build to rent market update and virtual networking event. For more resources, scroll to the bottom of this page.
The ten-year overnight success… we saw it with Self Storage and Student Housing as pioneers set the stage for massive institutional investment opportunities. Since the Great Recession, Single Family Build to Rent has emerged as a hot new asset class and captured the attention of investors and builders alike.
It has compelling investment opportunities with secular tailwinds to deploy significant equity in housing solutions and advanced production methodologies.
The structural and societal bias toward home ownership will continue to erode. With government policy (tax benefits and subsidies) for home ownership declining along with the societal bias against renting continuing a long- term decline, rental property occupancy should continue to increase. Whether out of necessity or choice the tailwind will be for apartment and single-family rent production.
The SFR industry was (and still is) primarily managed by small operators with their assets primarily in previously owned homes.
A decade ago, entrepreneurs took advantage of pricing drops as foreclosures hit the market in record numbers. These entrepreneurs, such as Waypoint, quickly adopted digitization tools and gained institutional scale both in terms of their operations and their ability to raise institutional capital. Other entrepreneurs, such as BB Homes, saw an opportunity to build new single-family homes specifically for rent in communities of other new rental single-family homes. There was a pricing discontinuity there also as the cost of land and construction had dropped enough that building was more cost efficient then bidding against others at the courthouse steps for used foreclosures. Again, these entities scaled quickly and attracted investment capital.
Written off by many as a distressed asset play that would not work when the market normalized, these entrepreneurs demonstrated that the business model did work in normalized circumstances, albeit with different rules and organizational structures than traditional for-sale homebuilders.
The theory that there was is a sustainable business model for new homes built specifically for rent, particularly in subdivisions and master planned communities has now been proven.
Innovations to the current business model for building homes and communities specifically for rent will make it even more attractive.
Two of the key lessons from the current business model are that:
With labor and supply chain constraints across the industry, the simplicity and predictability of the SFR business are driving quicker adoption of off-site and modular solutions as well as the testing of new material options and building systems, such as steel framing and HercuWall. The capital and developers behind build for rent have longer investment horizons, quickly taking to the benefits of off-site construction to meet the product’s inherently higher absorption rates, production rates, and simpler and more consistent design. With no customer or real estate broker in the mix to inhibit such changes, the industry can move more quickly toward innovation than the for-sale business model.
This ability to more quickly try, test, and learn from new products and methods will make the SFR business the leader in innovation and that innovation will drive additional capital investment as the productivity benefits become (even more) apparent.
Speed of adoption and simplicity will have spillover effects into the for-sale market, albeit more slowly.
Similar effects will be felt in the adoption of digital tools such as integrated planning with BIM, tighter labor choreography on site, and the increased use of robotic and drone solutions on site.
In terms of consumer relationships with tenants, expect the industry to innovate there also. The adoption of sensors to monitor and control such things as air quality, moisture, airflow, water quality, and other home utilities will not only make living environments healthier but will also begin to set new methods for the for-sale markets. (Read more about our thoughts on Healthier Homes)
Also expect the industry to test longer term leases that are triple-net, much like commercial leases, where variable costs are passed on to the tenant in return for the longer occupancy period. Rental will begin to look more like home ownership, without the need for down payment or the drag of the in and out costs of purchase and sale. We are already seeing models that can provide an equity-like benefit for the tenant in the form of either options to purchase or the ability to own REIT shares of the entity who is the landlord.
We became accustomed to the purchased home being both a utility for shelter and a long-term investment vehicle. The rental model allows the bifurcation of these two functions into ones that the tenant chooses (or not).
Because rental landlords also provide services for their tenants, smart builders will begin to look at the “housing as a service” model as a potential income stream model for homeowners also, much as auto dealerships value long term customer relationships with the service department being the long-term annuity after a car sale. Right now, most builders throw away this opportunity by just treating the customer’s warranty claims.
Builders who learn the SFR business model methods will see new opportunities in the for-sale business and will begin adopting them. This is how innovation will migrate faster than it has in the past.
New joint ventures, partnerships, and entities will find the SFR space appealing, recognizing both the economic advantages of the business model, and also the window into innovations that will migrate into the larger for-sale space.
We have already seen traditional building product manufacturers partner with off-site factories and entities offering digital solutions looking for other partners closer to the end customer.
Because many of the new methods and solutions cross traditional industry structures, collaboration will make the most sense to scale quickly. Where these partnerships do not happen quickly enough, expect to see private equity take positions in slow-to-move companies to accelerate the buried value these combinations will bring.
There will be particular pressure on existing large-scale builders, manufacturers, distributers, and tech providers to drive these partnerships. It will not be comfortable in executive suites and board rooms as this transformation accelerates. #CollaborateToInnovate
As in all change, there will be heel dragging, most likely on the government and regulation side of the ledger. Who will take ownership in the outreach and education in this arena to help break down these roadblocks?
We have the ability to drive innovation at scale and we’re already seeing the commitment from firms willing to walk away from projects if it means doing things the old way. This market segment bears the potential to drive long term value creation for our industry beyond what has been discussed in many forums. It is the best platform for scaling new ideas in the industry.
We believe that the SFR industry will be a key element in the improvement of the productivity of the overall housing industry in the United States and will be an important driver in the improvement in housing availability and affordability in the country.
As the housing industry, we can come out of the shadows and lead change. This is a critical moment. It will be an immensely exciting and rewarding time for those who choose to shape the future of housing. Let it not be wasted.
Understanding Build to Rent, Part 2 - What, Impact + Best Practices
A Developing Business: Thinking About The Next Wave Of “Built-For-Rent” Housing - By Brad Hunter, Hunter Housing Economics, Published on Forbes.com
Why Build-to-Rent is the Hottest Thing in Home Building - from ConstructUtopia
Are Traditional Home Builders the "Sleeping Giants" of the Single-Family Build-for-Rent Expansion? - RealFoundations