By Bruce W. McNeilage, CEO Kinloch Partners.
Do you know a great way to differentiate between a fad and a trend? Just watch Wall Street. They don’t invest in fads.
Build-to-rent single-family homes provide a great example. What started primarily as a grass-roots strategy employed by builders and real estate developers has grown into a multi-billion-dollar investment strategy, super-charged by large institutional investors and publicly traded REITs.
According to Hunter Housing Economics, investors will put some $40 billion (paywall) into build-to-rent development in the next 18 months. That sounds like much more of a trend than a fad to me.
Why is this space so hot and getting hotter by the minute? Economics is driving consumer behavior. The average U.S. home price hit $287,148 in May 2021, a 13.2% increase from May 2020, according to a new report from Zillow. That’s a record rise since the company started collecting the housing price data in 1996. Rents are up, too, at a 10.9% growth year-over-year, according to CoreLogic. That’s still a more affordable jump than housing prices.
Household incomes aren’t coming anywhere near keeping pace with rising home prices. According to the United States Department of Housing and Urban Development, the average household income in 2021 will be $79,900, up just 2.4% from 2020. Quickly escalating home prices combined with modest income increases are squeezing people out of the market.
Inflation is compounding this challenge even further. Inflation grew by 6.8% in November 2021 compared to November 2020. It was the highest rate of inflation since June 1982, according to the United States Bureau of Labor Statistics. As consumers watch their buying power erode, they simply don’t have the money for the long-term commitment tied to home purchases. Renting is still often the best (and often only) option.
Cash-Strapped Millennials Continue To Drive Build-To-Rent Trend
Demographics continue to play a role as well. Millennials, consumers ages 25 to 40 in 2021, are now the largest age group in the country. There are 72.1 million millennials compared to 71.6 million Boomers (ages 57 to 75). Millennials are entering their peak family-building years. They want out of their early-adulthood apartments and want something with a yard. And four walls. And good schools. And nice restaurants and bars. They want houses in nice communities.
However, they are often saddled with massive amounts of student debt. This debt, combined with slow income growth and escalating home prices, leave them with few options. They still need to rent.
And, that’s where build-to-rent can hit its sweet spot: the intersection of desire for a home and economic reality. In my own company, I’ve observed that while most millennials are hesitant or unable to pull together a 20% down payment for a home purchase, they are willing to pay a premium on their monthly rent. In fact, many rental customers are willing to pay a premium of about 10-20% over local market rental rates for the privilege of living in a new home. Why? Developers and investors need to understand that they are gravitating to areas with good schools, recreational opportunities and good restaurants, bars and entertainment options.
In my opinion, it’s a formula for success, and it looks like it’s here to stay for quite some time. Despite an increase in average rents 10.9% year-over-year, vacancies are at a 25-year low, according to CoreLogic. For investors, rentals are profitable, and demand is high.
Wall Street’s $40 billion in investment in the next 18 months portends well for build-to-rent. Student loan debts aren’t going away any time soon. Millennials can’t turn back the clock. They are entering family building mode in droves. It all adds up to a positive business strategy for the companies in this sector. Build-to-rent is here for the long haul.