Multifamily homes have been hugely popular in the Phoenix market over the past few years, but the proliferation of rental home construction communities has been the most surprising success of all.
What is rental housing construction or rental community construction?
What are Build-to-Rent Communities? Also known as Build-to-Rent (BTR) or Build-to-Rent (BFR), these communities are a unique segment of the Single Family Rental (SFR) market. They are entire communities of detached, detached, or linked townhouse style residential units built specifically to be rented rather than purchased. Different developers have different operating models, but most are gated communities featuring one- to three-bedroom homes with small backyards and a variety of upscale amenities.
Phoenix leads the nation with more than 6,400 BTR homes in the metro area. At the national level, the rental home construction community is expected to see an even bigger boom following last year's strong performance. According to data from YardiMatrix, more than 6,700 BTR homes were built across the U.S. last year, with 14,000 expected to hit the market this year.
It's been 18 months since we first covered the rapid growth of single-family rental homes in Phoenix, and since then, things have only gotten worse. Let's take a look at where we are today.
The unique appeal of a rental housing community
One reason for the popularity of rental housing is that both renters and investors can benefit from the advantages of this hybrid model. The timing of the COVID-19 pandemic created a perfect storm for this sector. With more work-from-home options, many renters were attracted to the extra space and privacy that traditional apartment complexes offer. For others, low supply and high demand for single-family homes, combined with job market uncertainty, meant postponing the prospect of ownership. And another benefit is seen in the lifestyle itself, offering a lock-and-go, zero-maintenance, resort-style environment with all the amenities.
Meanwhile, investors and residential developers view BTR as a triple play: a high-growth segment that generates higher rents and generally has lower tenant turnover than traditional apartment communities. Smaller investors have long recognized the cash flow and tax benefits of single-family rental housing, as well as its relative flexibility and liquidity compared to multifamily properties. These same economic principles are increasing its appeal for larger developers who are moving in with full force.
Which companies develop rental housing in Phoenix?
These advantages have seen a growing number of players enter the Phoenix rental home construction market, including local rental home builders such as NextMetro, Walton Global, Empire and Christopher Todd, who have built more than 5,000 units today with more than 7,000 under construction. Overall, the Valley is home to approximately 50 rental home construction communities, with more than 160 in various stages of planning. And this homegrown trend is not limited to the Phoenix metro area: Capital Development Group recently signed contracts for the first two of five BFR projects in Prescott and Casa Grande.
BTR opportunities are also attracting investment from outside the state. Notable examples include:
In the fourth quarter of 2021, San Diego-based Logan Capital Advisors acquired NexMetro's Avilla Paseo single-family rental community in Deer Valley for $417,980 per unit. GTIS Partners LP, a New York real estate private equity fund manager and developer, recently purchased a site in Glendale where it plans to build 144 units. In October, Utah-based vertically integrated commercial real estate investment firm PEG Companies launched a capital fund aimed at developing and managing luxury BFR communities in the Mountain West, including Arizona. Illinois-based Inland Real Estate Acquisitions has purchased approximately $2 billion in single-family rental assets across the United States, including 10 gated developments in the Phoenix metropolitan area. As of the end of 2021, California-based American Homes 4 Rent had developed four BTR communities of 30 to 130 units in Phoenix.
Future BTR Trends
Despite BTR’s popularity, the trend is not without its challenges. After all, homeownership has long been considered part of the American Dream. Not only is it a path to building long-term wealth for individuals, but it’s also an investment and commitment to a community that creates stability once you put down roots. At a time when the Valley is desperate for more housing, BTRs consume significantly more land to put your head on in bed than an apartment. BTRs also face the same increased material and labor costs that plague both homebuilders and apartment developers. Finally, they can also face opposition from local governments, especially when homeowners reject the idea of increased rental property and traffic.
Despite these issues, the market appears to be thriving for the time being. The average rent for a single-family home in metro Phoenix rose about 20% in 2021 to $2,025, according to CoreLogic, but occupancy rates have stabilized in the high 90s, which will surely create a race for investors and developers to chase the fast-growing sector. It's a trend that's currently catching the attention of traditional homebuilders such as Lennar Corp. and PultiGroup (through its partnership with SFR REIT Invitation Homes). Perhaps the best indication of the trajectory going forward is the money in the pipeline. About $85 billion is currently being pumped into rental housing construction projects, enough to develop 315,000 homes, according to housing research firm Zelman & Associates.
Contact ROI Properties
ROI Properties represents investors, owner-occupiers, lenders and trustees in buying, selling and leasing commercial real estate in the greater Phoenix metropolitan area and throughout Arizona. Whether you need help investing in real estate (mainstream or distressed), we are a full-service real estate brokerage handling all commercial asset classes. Additionally, we are court-appointed and act as trustees as Real Estate Special Commissioners/Special Masters, Chapter 11 Trustees and Liquidation Agents, and REO Brokers. Contact us to get expert counsel on your side. [email protected] or call 602-319-1326.