The Emergence of Single Family Rentals
Coming up on Multifamily Minute.
Jeremy Edmiston:Most of Build to Rent is capturing the essence of living in a single family home neighborhood.
Sam Tenenbaum:We've seen varying degrees of myths that arise around institutional ownership of single family homes.
Jeremy Edmiston:There are efficiencies that can be achieved from an expense perspective and from an expense ratio perspective, which then impacts NOI, which then impacts what the value is based on a cap rate and so forth, there's less turnover, and that lowers the risk. So the integrity of the rent roll as a whole, because they are higher earners, slightly older in age, you're gonna have longer run rates and more predictability on the income flow.
Host:This is Multifamily Minute by Cushman and Wakefield.
Sam Tenenbaum:Welcome to the Multifamily Minute hosted by Cushman and Wakefield, where we dive into what's on the minds of investors, operators, and market observers in the multifamily commercial real estate market. I'm your host today, Sam Tetenbaum, Cushman and Wakefield's head of Multifamily Insights. Today, I'm pleased to be joined by Jeremy Edmondson, who's an executive managing director and lead of Cushman and Wakefield's built to rent space. Hi, Jeremy.
Jeremy Edmiston:Sam, good to see you.
Sam Tenenbaum:Likewise. Always a pleasure to speak with you. I wanna kick our conversation off today with just a quick definitional conversation. Tell me what the build to rent space is and how it differs from the multifamily market.
Jeremy Edmiston:So in the simplest terms, build to rent, if you'll picture a detached single story home, whether it's single platted or it's on a multifamily zone site, a contiguous site, a home that is built intentionally for rent for the long term. And some of these homes have backyard spaces. Some of them do not. But, again, simply put, a single family home detached, mostly single story, purpose built for rent. And how that's different from multifamily is, 1, multifamily stock today in the United States varies in ages.
Jeremy Edmiston:20% of the overall built to rent stock today is under construction as we're having this conversation. So from an age perspective, most of the stock today is literally brand new and some as old as 5 years. Big differences there that are obvious from a physical standpoint. And then just from how we market these. Right?
Jeremy Edmiston:The profile of the renter today tends to be older. Your average lease holder in the multifamily space as relates to our portfolio is 27. And the builder rent space, it's closer to 40. Goes into the high to mid thirties for the town homes. And for the detached homes, tends to be 42 in age.
Jeremy Edmiston:Although similar demographics and segmentations, there are differences in needs. I think also the psyche of living and and renting a build to rent home, most of these, call it 99% of build to rent, is in very much a a suburban environment. You're capturing the essence of living in a single family home neighborhood where perhaps most of the homes are owned and not for rent. Right? Those are, at the highest level, the most simplistic differences that I see.
Sam Tenenbaum:I think that's a a great foundation for the rest of our conversation because, you know, we're fundamentally talking about here are single family homes. Right? And we've seen varying degrees of myths that arise around institutional ownership of single family homes, whether it's the buying of neighborhoods, all the way down to stealing away the American dream from ordinary, everyday Americans. And I'm wondering what your favorite one is, and if you could help debunk it or demystify it a little bit. I think that'd be really helpful.
Jeremy Edmiston:Yeah. My favorite myth, it's the one that's talked about the very most or let's say it's weaponized against the space in general. And that is that Wall Street and institutional investors are gobbling up every home for rent in the United States and throwing in the build to rent space into what are more of the scattered random individually owned homes that happen to be for rent and throwing everything into that bucket and throwing out numbers that the data just doesn't support. So an example of that, the institutional investment community, some people describe it as Wall Street, owns today 4% of the rental stock that's out there that would be considered to be build to rent single family rentals. Another area that just kills that myth is build to rent communities are not taking away opportunities for Americans to buy homes.
Jeremy Edmiston:Right? These, again, back to that simple definition, this could be a 30 acre site with a 150 homes with amenities, all those things where there's not the option to buy any of these homes. They're all for rent. They're not disguised that they are for rent.
Sam Tenenbaum:They are put out there
Jeremy Edmiston:months months ahead of time, really, as a new product line. So the opposite of that argument is the build to rent space is actually a solution to the crises that are talked about within that myth.
Sam Tenenbaum:In your first question, or your first answer rather, your discussion point around the the asset class being relatively new, I think is an important one as it relates to this myth as well. Because when I think about renting a home, I think about when I rented my last home, and I found a person on Craigslist who was not local, who lived internationally, who had a property manager, who required me to pay in physical check form in his office, all the way across town every month. And it was really inconvenient and not what you would expect coming from professional apartment buildings. And so, can you talk a little bit more about the professionalization of management in the space too? Because I think that's one of the evolving trends that we're certainly watching, and I think was key to your role here at Cushman and Wakefield.
Jeremy Edmiston:That's a great question and a great point. And back to those differences that are important. When you're living in a build to rent community and it's being professionally managed, let's say it's being managed by our firm, the confidence there is the scrutiny in the screening process. And not only for you as the guest and resident, but as you look down the street, your neighbor to your left, to your right, across the street, everyone on that block is living in a rental home managed by the same company, having to execute the same agreement. And although we don't guarantee safety and security in the property management space, what you can rely upon is that everyone has gone through a fair and equitable process when it comes to the integrity of they are who they say they are.
Jeremy Edmiston:I'll add upon that. Although we're using all types of technology and that kind of stuff and so forth for property management, we are physically there. That there is a presence. There is a consistent frequency that you live in one of our build to rent communities we manage. We are not hands off coming in once a quarter to see what's happening.
Jeremy Edmiston:Right? Our team is on the site walking through the community and checking in. So that's a different level of quality control and living up to that experience about why you are paying a premium to live in a builder at home versus a home that might be 30 plus years old, and you're leasing it from an individual. Also, where you don't really have the confidence in the financial backing and the wherewithal that if something does go wrong, that repairs can be made in a timely manner, right, using technology where you can communicate that need as quick as possible and that you have trained, screened, and veteran maintenance team to come in and be able to take care of the problem. That's a really big deal.
Sam Tenenbaum:Jeremy, there there are, I'm sure, a ton of challenges in just the property management space to begin with, but I can't imagine that there are special and unique challenges in the BTR SFR space. Can you highlight some of those, for our listeners?
Jeremy Edmiston:As we've entered the first phase and and phase defined by, okay, the first 5 years, this helping to define what the space is going to be for the future. And one of the challenges today is we're still in discovery mode of what works the best in design, in flow. One of the biggest challenges today, because in some parts of the country, it's a little bit the wild west, of design in zoning. And zoning meaning going from plans to city approval, that kind of thing. And specifically on the parking side.
Jeremy Edmiston:Often because of trying to squeeze in density to make the numbers work from a financial perspective. Often, even though we make our plans, we understand what our target demographic segmentations are going to be. We set the rents. But when you start leasing one of these communities up, we're typically not very far off of who we think is gonna live there from a just high level demographic information. But when it starts to become a living and breathing community, parking can become an issue.
Jeremy Edmiston:Another thing is because of some of the ages, you have folks who may have grown up in a single family home, but now coming in, being independent, and there's a different process compared to multifamily as it relates to an orientation. We're very intentional about the use of mechanical system in a bill to rent, Hot water heaters, electrical panels, those things are located differently and are more accessible to a resident. So you're able to set the tone as to what the resident's responsible for, what they're not responsible for. There can be challenges there, but I would say today, just as relates to that resident experience, it is more driven around just very simple stuff that can have an effect on a community. But that goes back to it's an advantage to have institutional control over an entire neighborhood where, in essence, you may have different landscaping packages.
Jeremy Edmiston:Right? But the yards all look the same. They're all mowed for the most part on the same day. So you have a very consistent look. But to say that it's all wine and roses and no one gets out of line, that that's also a myth.
Jeremy Edmiston:Right? You we have to do a little bit of diplomacy on, okay, nice job of keeping the trash out of your yard. But if you could not park in the grass, that would be great. That's just one of many, but that's one that's just yeah.
Sam Tenenbaum:There's one other question I would like
Sam Tenenbaum:to get to before we talk about where the market's headed.
Sam Tenenbaum:And that's the thesis of BTR versus multifamily. Why would an investor put a dollar into a BTR product over a traditional multifamily product? What are the themes that they're looking for that would dictate investment in the BTR product over a traditional multifamily asset?
Jeremy Edmiston:I would say 1, and we're seeing this play out in real time, And I'm not saying that it's true in every case, but one being that there are efficiencies that can be achieved from an expense perspective and from an expense ratio perspective, which then impacts NOI, which then impacts what the value is based on a cap rate and so forth. But really, the notion that there's less turnover. And that feels like that lowers the risk. And perhaps because these are also higher earners. So the integrity of the rent roll as a whole because they are higher earners, slightly older in age, that there's going to be less turnover.
Jeremy Edmiston:You're gonna have longer run rates and more predictability on the income flow. And then 2, and not shocking, especially with the rapid increase in institutional dollars that have been raised and not yet deployed, and also the ability to have more consistent increases as it relates to the ebbs and flows of rents, and also a little bit of a lower risk profile because the sizes of the communities and exposure.
Sam Tenenbaum:And
Jeremy Edmiston:then lastly, I'll say, depending on the zoning, there's more opportunities for creative exits to convert to for sale homes. There's a little bit more elasticity in that exit.
Sam Tenenbaum:One of the things that I tend to point to when I talk to clients about BTR product is really the demographics behind the BTR space as well that I think are worth highlighting. We wrote a piece at the end of last year where we talked about the case for BTR, and I think, to me, it fundamentally comes down to Americans are getting older, millennials are getting married, they're having kids. As you illuminated earlier, Jeremy, with the demographics within our communities, as those millennials start settling down and having kids, they may not be able to afford a single family home, just given how unaffordable mortgage payments are with high rates and high prices for single family homes. And so if they're looking for that kind of lifestyle, your point is, I think, really important here that this product didn't really exist from a renting standpoint, at least with institutional management level until very recently. And given that, I think this is a sector that's poised for a lot of growth.
Jeremy Edmiston:That's good. You make a great point because I can look back and as a personal anecdote, my wife and I out of college in the late nineties. This would have been fantastic as a bridge if you so choose to buy a home, but this type of bridge didn't exist outside of getting lucky and finding a home or a townhome for lease and the one ads owned by an individual, and you were also subject to, really older not so good stuff. The average single existing single family home in the United States, the average year construction is about 1978 versus all of this is brand new.
Sam Tenenbaum:That brings us to our final question here is where do you see the market heading in 2025 and beyond? Now that we've talked about some of the demographic drivers of that, where where do you see the market headed from your perspective in the next year or 2?
Jeremy Edmiston:Yeah. 1, in 2025, the institutional deployment by way of acquisitions of stabilized or near stabilized built to rent is going to not only continue, but there's going to be an uptick. We're already seeing that. And, of course, the best located deals where the rent growth potential is not being hammered by supply, those are gonna go first. That's happening in real time.
Jeremy Edmiston:The continued allocation within overall multifamily funds specific to earmark for build to rent, in my view, is gonna continue to grow. We've seen over the last 6 years, billions raised and deployed from south of 10,000,000,000 to now approaching more of a $100,000,000,000 range. And that's not deployed, but that's raised. And we're starting to see the evidence of that, again, by way of direct acquisitions as well as development equity. Now in the near term, no doubt about it.
Jeremy Edmiston:There's some markets where supply has ticked up. That's gonna erode some rent rolls for a while. Demand is there. Occupancy, strong, all things considered. Delinquency, not getting out of the budgeted spectrum.
Jeremy Edmiston:And as we get into 26 and 27, when a good number of the supply today has been stabilized, and if we continue on the track today with difficulty of getting new deals done when it comes to the capital stack, that's when we're gonna start to see rent growth now that will probably get north of 4, 5, 6% again. Not saying it's gonna scream up toward 10 plus, but we're gonna graduate from minimal rent growth again. That that's what I see happening 25, 26, 27.
Sam Tenenbaum:That's a really encouraging sign and, a broader trend that we're seeing across the multifamily landscape with those deliveries pulling back, allowing for a little bit more rent growth. But I think your point is incredibly valid that I think with the demographics, with the Right. Incredible supply shutdown, we we went from, I wanna say, 30% of the inventory under construction nationally among institutional sized product in in our competitive landscape. Even though on a percentage basis, that looks really scary, that was 20 or 30000 units nationally. It wasn't a huge number on a nominal basis.
Sam Tenenbaum:That number is is down drastically this year and will further fall next year, which means that this market, because it's so specialized and such a niche product, that has a a growing demand base for it, I think we would expect to see more rent growth in that space than than the broader multispace.
Jeremy Edmiston:Agreed. And I'll just lastly say that the fuel behind it is especially in the Sunbelt markets, it's really been around about 53 zip codes between Texas, Georgia, North Carolina, and Florida. So the next 2 to 3 years, that's where we're also gonna see the same growth because that's where the jobs are and all that. And the fuel behind it is even though we're going to see maybe some consistent reductions in interest rates. Okay.
Jeremy Edmiston:That's great. Part b is pricing's up across the country about 4% in existing homes. We're not in a position to deliver homes at a rate that we need to, meaning home builders. Right? And so from a pricing perspective, what I'm predicting is on the psyche of the American consumer, okay, rates have gone down to the 50 bps.
Jeremy Edmiston:Oh, I can get a 30 year at 6%. I think, conversely, what you're gonna see is another pricing frenzy, another pop a little bit on pricing. Because all of a sudden, there's gonna be more competition to buy homes again, yet we can't keep up with the inventory. So that all spells for the coming years. That is a green light for Built to Rent.
Sam Tenenbaum:Thank you again, Jeremy, for, sharing these insights. I think it was a great, deep dive in a short format to really understand what's going on in the BTR space. We wanna thank our audience for listening as well. To hear more episodes of the Multifamily Minute, please subscribe to our podcast on Spotify, Apple Podcasts, or the podcast app of your choice, and visit cushmanmakefield.com/multifamilyminute for our complete archive.
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