Build-to-rent, a property type that typically includes clusters of leased single-family houses, has expanded rapidly for several years. But some real estate professionals see a coming slowdown in the construction pipeline for a property type that, despite recent outsized growth, remains in short supply.
While the developments still account for a small portion of housing in the United States, project completions increased 270% from 2019 to 2023, according to the National Rental Home Council. Last year, the organization estimated nearly 25,000 build-to-rent homes were completed, a 62% increase from 2022.
But a CoStar analysis of build-to-rent completions indicates that though this year should see the arrival of as many as 34,000 new build-to-rent units, completions could drop as much as 73% in 2025 to as few as 9,500 units as the industry contends with the same limited lending and other capital constraints that's holding down multifamily development.
Brad Hunter, founder of Hunter Housing Economics, a firm that provides market studies for build-to-rent projects nationwide, said he's seen the slowdown developing over the past year: "As long ago as about nine to 12 months, about half of my clients were saying they couldn't find debt, and the other half were saying they couldn't find equity. The banks exited that sector altogether as soon as interest rates went higher."
Hunter added that the drop-off in build-to-rent starts could reach as much as 50% later this year and into 2025 from the highs in 2023: "That is going to mean that projects that do get funded and do get started in the next 12 months and emerge in the market, ready to rent in 30 to 36 months, are going to be in great shape in terms of the competitive landscape."
That shift is playing out in the strategy of rental housing developer Middleburg Communities, a builder of both apartments and single-family houses to rent. It's been increasing investment in rental houses.
The Vienna, Virginia-based company most recently broke ground on The Hamlet at Quail Crossing, a 260-unit build-to-rent development located at 1423 Deerfield Drive in Wake Forest, North Carolina, near the state capital, Raleigh. Plans for the development include designs for more than 230 detached houses and 26 duplex units in an area where median home prices have surged beyond $550,000. Units are expected to include finishes similar to traditional Class A apartment developments across a mix of one-, two- and three-bedroom unit types that range from 790 to 1,733 square feet.
Bet by lenders
“The Raleigh [market] has attracted significant attention from capital and consumers alike and for good reason,” T.J. Sedeski, managing director of investments at Middleburg, said in a statement. “The employment and education opportunities, pro-business policy, and work/life balance make it a compelling place to both live and invest and we believe we’re meeting an unmet demand for high-quality rental cottages which do not currently exist in the Wake Forest submarket.”
Quail Crossing represents the latest development in Middleburg’s push into build-to-rent that over just three years has grown to $700 million and a portfolio of 2,300 homes.
In the past nine months, Middleburg has closed on four build-to-rent deals, including three in 2024. Quail Crossing marked Middleburg’s eighth build-to-rent development overall, and the company told CoStar News it has recently closed on its ninth.
“Despite the challenging capital markets environment, we had our biggest year ever in 2023, consisting mostly of build-to-rent starts and have continued to see demand for build-to-rent investment,” Aaron Tishkoff, assistant vice president of acquisitions at Middleburg, said in an interview.
A main driver behind Middleburg’s strategy is the gap between the number of traditional multifamily developments and build-to-rent projects that has produced higher rent gains relative to multifamily peers. According to CoStar data, traditional multifamily supply has expanded by 2.4 million units in the past five years. Over that same time, just 124,000 build-to-rent units have been completed nationally, accounting for only 5% of all new rental units.
Advantage: Build-to-rent
The relatively small portion of multifamily property that build-to-rent accounts for is already generating above-average rent growth at Middleburg's major competitors.
Two of the largest build-to-rent developers in the country that focus exclusively on the property class, American Homes 4 Rent and Invitation Homes — a firm that has promised to invest $1 billion in expanding its portfolio this year — averaged an annual growth rate of 5% in the second quarter. Meanwhile, traditional multifamily developers such as Mid-America Apartment Communities and Camden Property Trust recorded just 0.1% growth over that time, with new lease rents down 4.2%.
Tishkoff says Middleburg’s build-to-rent portfolio has generated a 15% to 20% premium over rents for similar-sized conventional multifamily units.
Data from the Federal Reserve shows house prices have risen nearly 33% in Wake County since the pandemic and the multifamily construction pipeline in Wake Forest that has opened more than 1,700 Class A apartments — but not a single build-to-rent development over the past two years. Tishkoff sees any slowdown in new construction as a tailwind to even higher performance.
Quail Crossing will be completed "at a time where the rental market is more favorable just because deliveries will be much less and there will be less competition,” he said. He expects to open to residents in the third quarter of 2025, adding later that Middleburg is still “going heavy into build-to-rent in a big way.”