woman sitting on front steps of house

Home Builders Remain Focused on Rentals

Investors Bet on Suburban Living Trend

In the year ending September 30, more than 50,000 new homes were built in the United States…for use as rentals. Those houses are part of a trend toward building-to-rent, as Americans search for more space and landlords seek more income. Historically, just 1% of new homes are built and then sold directly to investors, but those in the industry expect that average to exceed 5% over the next few years.

Wall Street firms, individuals, family offices, and pension funds have invested billions of dollars in rent-to-build projects. American Homes 4 Rent (AMH) has formed a $625 million partnership with J.P. Morgan Asset Management for new rental homes. Another large rental company, Tricon Residential (TCNGF), has a $450 million rental-building partnership with Arizona State Retirement System. These partnerships often result in whole neighborhoods of single-family rental homes, similar to apartment complexes but also indistinguishable from other suburban developments.

Homeownership Unaffordable for Many

As US residents looked for more space during coronavirus lockdowns in 2020, home prices also rose to record highs. Those home prices have surpassed earnings growth, so even though low interest rates have made borrowing exceptionally cheap, homeownership is unattainable for many. Homeownership is now unaffordable for the average worker in more than half of US counties. That is up from 2019, when homeownership was unaffordable for 43% of that population.

Still, Americans in the midst of a pandemic are in search of homes where they can safely live, work, and spread out a little bit. Landlords of single-family homes say they have experienced record occupancy since the pandemic’s start, and rents for single-family homes have ballooned.

How Building-to-Rent Developed

Building new homes to rent boomed as a concept a few years ago, when landlords who purchased huge swaths of property during the housing crisis started looking for new properties to acquire. After the housing crisis, banks and lenders stopped financing purchases by people in the lower-middle class, and that made builders stop developing smaller, entry-level houses. So mega-landlords started building their own rental homes.

Investors realized they could charge premiums for renting brand new homes, and they could put their preferred finishes on the houses from the start. Building to rent also increases developers’ flexibility and allows for more favorable financing. With this low risk and high demand, investors will likely continue betting on suburban rentals for the next few years, at least.

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