A $3 billion wave of fresh investment into built-to-rent housing is spotlighting demand early in 2024 as persistently high mortgage payments hold back existing tenants from making the leap into homeownership.
Middleburg Communities is embarking on a financing deal with Simmons Bank for the construction of a 260-unit project in Midlothian, Virginia, outside Richmond. The development marks the second built-to-rent development in Midlothian for the company. The other, Hamlet Watkins Centre, is already under construction.
Built-to-rent projects are made up of single-family houses for the purpose of leasing each house to a sole tenant. These properties, typically arranged in clusters, have become attractive investments nationwide — even to Blackstone, the world's largest commercial property owner — as the costs of buying a home remain elevated with interest rates relatively high.
“One of the biggest thoughts was we were looking at people just not being able to save up for a down payment, regardless of interest rates,” Aaron Tishkoff, assistant vice president of investments at Middleburg, told CoStar News. “And that people really want to live in a single-family home,” he said, citing surveys showing 70% to 80% of people would prefer that type of housing.
“So we’re trying to provide the next best alternative,” Tishkoff said. “You’ve got your own four walls, you’ve got patio space, private yard space, and you can still live in that single-family neighborhood.”
In addition to the financing deal, Middleburg confirmed to CoStar News the opening of its first built-to-rent project, a community in Huntsville, Alabama. Residents have already moved into 13 units in the initial phase of development. The company expects another 27 of 231 total planned units to begin leasing next month.
In total, Middleburg has invested more than $500 million in its built-to-rent portfolio, the company said. Middleburg has four additional built-to-rent developments under construction in Charlotte, North Carolina; Charleston, South Carolina; Jacksonville, Florida; and Wilmington, North Carolina, in addition to the Huntsville project and two developments in Richmond. Taken together, the projects are expected to complete roughly 1,800 units.
To be clear, built-to-rent still remains a small component of the single-family housing market with an estimated 340,000 units nationwide as of June, according to the brokerage CBRE. That number accounts for just 1.7% of all single-family rentals.
Pretium Invests $2.5 Billion
Even so, Pretium, a New York-based alternative investment firm with more than $50 billion of assets under management, said it has invested $2.5 billion in built-to-rent houses. The investments have financed the construction of 7,500 built-to-rent houses across 37 cities in 11 states, including developments in Florida, North Carolina and Indiana.
"Decades of under-building and under-investment have led to today's shortage of viable housing in the United States,” John Pristaw, Pretium’s head of real estate, said in a statement. “That deficit can only be fixed with new capital invested to create new housing supply."
A study commissioned by the National Multifamily Housing Council and the National Apartment Association in 2022 estimated the United States needs to build 4.3 million new apartments by 2035.
Investments by Middleburg and Pretium come on the heels of Blackstone’s $3.5 billion deal to purchase Canadian-based developer Tricon Residential. Tricon operated 38,000 built-to-rent houses in the U.S. when the deal was announced in mid-January. As part of the transaction, Blackstone said it expected to invest an additional $1 billion to develop roughly 2,500 homes that were already in Tricon’s pipeline.
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“Due to current home purchase market conditions and interest rates, [built-to-rent] is growing exponentially,” said Christopher Ritchey, senior regional director at RangeWater Real Estate, an Atlanta-based owner and operator of traditional multifamily properties and built-to-rent communities across the Southeast, Texas, Colorado and Arizona, in an interview with CoStar News. The sector “is set to dominate the industry in the coming years … [built-to-rent] is here to stay.”
According to the National Rental Home Council, close to 25,000 built-to-rent houses were completed in 2023, a 62% increase from 2022. Since 2019, the number of built-to-rent completions has increased more 270%. Over half the homes completed in 2023 stretched across just four states, Texas, Arizona, Florida and Georgia. More than 4,000 were completed in Phoenix alone.
At the same time, the National Association of Home Builders said 37.7% of home sales, either new or existing, were affordable to households earning the U.S. median income in the fourth quarter. That proportion was almost unchanged from the previous quarter when the association’s Housing Opportunity Index recorded a 37.4% affordability rate, the lowest since it began tracking prices in 2012.
On its fourth-quarter earnings call Thursday, Mid-America Apartment Communities, one of the largest apartment owners in the country with an operation focused largely on the Sun Belt, said the lack of available affordable housing is beginning to affect renters’ decisions at its properties.
Brad Hill, MAA’s chief financial officer, said the company saw a 20% decline in move-outs of renters buying a house compared to the fourth quarter of 2022, citing costs that are 50% to 60% higher than rents within the company’s geographical footprint.
“That’s a significant hurdle for most people,” he said, noting that the inventory of for-sale homes is also declining as single-family construction has slowed. “We think that’s [pushing demand] into multifamily, and it’s also pushing folks to stay longer in multifamily” with the average tenure among MAA’s tenants now almost two years.
D.R. Horton, the biggest U.S. homebuilder by volume, said in November its rental business is surging.
This story was updated Feb. 14 to correct the location of Middleburg Communities’ Wilmington, North Carolina, project, as well as the firm’s planned number of units in Huntsville, Alabama.