Build-to-rent single-family houses may be an emerging asset class, but a Georgia firm is moving away from the concept in some smaller markets because of softening rents.

Trilogy Investment Co. had planned build-to-rent houses in Tallahassee, Florida, as well as in Winston-Salem, North Carolina, and Winder, Georgia. Instead, Trilogy ended up selling the sites to builders of for-sale homes, including Miami-based Lennar.

The build-to-rent concept does not work financially in some areas where rent growth is moderating as supply increases, Jason Joseph, CEO of Alpharetta, Georgia-based Trilogy, told CoStar News.

In those smaller markets, "People can only afford so much rent, but as buyers they can afford slightly more expensive houses," Joseph said.

Even so, he stressed that build-to-rent properties remain his company's primary focus because they still work in larger markets.

The emerging limits on build-to-rent demand come as single-family rentals have increased in popularity in recent years in larger cities. That's because higher interest rates are keeping some potential buyers in the rental pool. Elevated insurance costs and maintenance fees also have some people reconsidering homeownership.

It typically costs more to rent a house than an apartment, but that added expense often gives tenants more room and a feeling of stability without the financial commitment of owning.

Yet some consumers who are less concerned about those benefits are finding that renting a house is too expensive compared to leasing a mid-size apartment or buying a property, according to Sean Salter, a real estate researcher and finance professor at Middle Tennessee State University.

"From the builder's perspective, they know what their costs are, and they're trying to make the numbers work," Salter said in an interview. "They have to charge a certain amount in rent, but the market is not supporting that."

Selling lots in smaller markets to traditional homebuilders "is a rational decision to hedge some risk," Salter added.

Two of the biggest U.S. build-to-rent companies, Invitation Homes and AMH, each reported revenue grew more than 6% in their most recent quarter from a year earlier, an indication that single-family rentals remain viable in the right areas.

Dallas-based Invitation, the nation's largest single-family rental landlord, invests in larger U.S. markets, where it can manage thousands of homes and build a substantial operational platform. The firm also prefers growing markets such as Denver, the Carolinas and South Florida, in addition to mature and larger areas such as Chicago and Dallas. AMH of Las Vegas uses a similar strategy.

Smaller markets don't have as many well-to-do consumers who can afford pricier rents. The Tallahassee rental market weakened during the first quarter after the most new supply in nearly 18 years came on line, according to CoStar's latest multifamily market report.

This year will most likely be the third in a row for the Florida capital in which new supply significantly outpaces renter demand, keeping vacancies elevated, the report estimated.

Another area that may not support higher rents is Georgia's Barrow County, home to Winder and a region where the vacancy rate is 35.9%, according to CoStar.

Meanwhile, CoStar data shows rents in Winston-Salem average $1,190 a month, well below what a typical consumer would have to pay to rent a newly built house in the area.

When Blue River Communities bought the Tallahassee land from Trilogy, it paid $8.25 million for 75 lots, CoStar data shows. Blue River said in a statement the homes should be available for purchase sometime in the fall.

In Winston-Salem, Lennar paid $2.5 million for the first batch of 102 lots — and is now marketing to buyers instead of renters at a new community called Reynolds Crossing.

CoStar News staff writer Candace Carlisle contributed to this story.