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Notes on the world of build-for-rent

Cole Thompson’s excellent blog last week drew parallels between household income/home affordability issues that impacted production builders for sale product (post 2008 recession), as being the same guiding lights directing current build-for-rent programming and developments.

Increased household and family consolidation driven by affordability challenges are leading to an increased demand for more bedrooms under one roof. This philosophy and sentiment was echoed repeatedly at a recent BUILD FOR RENT CONFERENCE I attended in Nashville.

At several conferences I attended several years ago, much of the prevailing wisdom prescribed single parcel, small footprint cottage-style, maximum density, high rent per square foot, build-for-rent communities and developments. However, at the recent IMN BFR conference participants were consistently referencing a build for rent product which mirrors a for sale product in size, look and finish..

One of the most insightful comments I heard stated the best build-for-rent communities should take a page from the auto industry: No visible difference between the new product that will be purchased or leased. This is definitively different from some early BFR developments which sought for uniformity above everything else featuring the same elevation, monolithic, factory-line rows of homes that looked dated and aged even at CO. As one panelist said at IMN, no one wants to be a pioneer in BFR. However in this newly emerging asset class, we are all forging the path together. 

Look for a follow up blog from Cole Thompson next week, and also look for several Auben team members at the upcoming IMN SFR CONFERENCE in Miami.

I will be participating in the panel “Working With Large Institutions: Acquiring & Managing vs. Raising Equity vs. Joint Venture.

Here are some of my notes from the conference I attended in Nashville:

  • No such thing as universal BFR product, varies dramatically market to market 
  • Have to  consider micro-market factors to achieve maximum efficiency on BFR
  • Rent concessions are expected in markets in 2024 and 2025 given how aggressive projections of rents and rent growth were
  • Raising capital is very difficult now given returns on low risk options and market volatility
  • From an institutional owner/aggregator perspective, the scatter site model will be in the doldrums for a long time 
  • There will be more consolidation and dislocation which will be an opportunity for smaller investors in the next couple of years
  • Investors and developers should use data from scatter site SFR to inform BFR decisions
  • Stickier tenants in non-cottage BFR products 
  • Much higher price per square foot rents in cottage products
  • Currently, BFR is experiencing its own challenges for the first time. It will take its own path. 
  • Trend to no difference in look of rental versus “for sale” product. Think of new cars on the lot. No difference in what someone will purchase versus lease 
  • Average first time homebuyer stays in their home 4-5 years 
  • Average build for a home renter is also  4-5 years. 
  • Average cottage BFR renter 24 months, so more like a (multifamily) expectation/product
  • Built for rent is a bumper sticker, everything is labeled BFR because it gets you 40 BPS on financing
  • Developers are exploring the concept of building a BFR brand, not just a project
  • Phoenix is a laboratory for BFR. Short term it is saturated with 125 cottage developments. Phoenix Long term market demand looks good
  • Given the rate/debt market, more projects will be done with equity only with long term hold/view.
  • Given short term and midterm uncertainty, projects have to be done with a longer term hold
  • Current BFR Developer in Florida working on 12 projects in Florida, 10 of which were takeovers from developers who could not perform: Land was already entitled
  • Debt is plentiful. Will be lower LTC and lower LTV, usually in the 55-60%
  • Can go to 75% but you will pay for it: 14-17% interest rate range
  • Capital is creating a Flight to quality in BTR space 
  • No substitutes for local boots on the ground! Can’t be a hedge fund from NYC saying outbid all other buyers 
  • Optionality of sale vs. rent. 2024 year is being viewed as bridge to future developments Land is only 15-20% of total development cost
  • Capital always exists if the deal is right
  • Many scenarios of “right” deal
  • Certain developers won’t pursue a BFR project without onsite management and maintenance
  • Cost of BFR construction can be higher than a for sale product. Example of LVP flooring needed in BFR while carpet ok in for sale
  • Experience becoming more and more important for lenders 
  • Market allocation being considered more for lenders. 
  • Always develop/buy individual deeded/plated houses: 3 outs: Rent to tenant,Sell retail on MLS, or package in aggregate to an investor
  • Third party property managers help you better answer questions asked by capital and debt
  • Property management is very time consuming
  • First pass needs to always look at cost relative to replacement cost
  • Many owners have shovel ready entitled, developed sites not starting until consistent trend of rates up, down or sideways 
  • Befriend lenders, they know the folks who cannot refinance. 
  • Too many risks to be developer/builder, buy at CO
  • Follow  architects and engineers, first people not to be paid
  • Follow brokers who have their own department, BFR, SFR, etc. 
  • All projects being underwritten as build for rent and build for sale, simultaneously. 
  • Builders will walk away from littlest blip in market 
  • In Build for Rent, you don’t want to be a pioneer

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