The Two Fastest-Growing Types Of Built-For-Rent, And The Metro Markets That Love Them
Aug 25, 2023By Brad Hunter, Forbes Magazine
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There are two product types that are gaining share within the built-for-rent single-family (”BTR”) space, being 1) horizontal apartment communities, and, 2) townhome communities. These are the two categories of BTR that are growing fastest, evidenced by the numbers of units reaching completion, and also based on our book of market study business. Of course, traditional single-family developments (full-sized homes on individual lots) are coming out of the ground in large numbers as well, but the fastest growth right now is in these two “denser” categories.
The exhibit below shows the top ten markets ranked by the number of horizontal- apartment units delivered since 2016 (as of mid-2023). These kinds of rental units are usually marketed as “cottages,” and they offer two main advantages over traditional apartments: private outdoor space for each unit, and few or no shared walls.
The exhibit below shows the ranking of the top markets for BTR townhomes, which comprise another popular and rapidly-growing segment for rentals. Townhomes have comprised more than 35% of our BTR market study work. They differ from horizontal apartments in that they are not detached, but they often have garages, which appeal to many renters (and they usually offer more interior space as well).
Phoenix and Dallas-Fort Worth are the leaders, followed closely by Atlanta on the townhome ranking. Only a couple of Florida markets made the Top 10, as the wave of BTR is only now rising in the Sunshine State (but a lot more are planned for the next 12 to 24 months, as our studies indicate).
Toward the end of this column, I’ll mention some of the medium-sized markets that are starting to see a lot of activity, including Nashville, Huntsville, Orlando, Las Vegas, and Greeley, Colorado. Let’s look at a couple of the established/mature BTR markets first.
Phoenix: Where It All Began
We’ll start with the 900-pound gorilla that was the birthplace of BTR: namely, Phoenix. Phoenix has seen the most activity in the entire country with built-to-rent development since the very beginning, particularly the horizontal-apartment type.
The BTR business started out in Phoenix, born out of the distress of the Great Financial Crisis. Immediately after the GFC, investors were able to aggregate plenty of supply from foreclosures, but by 2012, they had exhausted much of that supply, and started to build whole new communities of homes for rent.
Increased competition has pushed vacancy rates higher in the three categories of rentals we are discussing here, as shown below, though the comparison between the second quarter and the fourth quarter does run into some seasonal differences. The increase in vacancy rates is fairly moderate so far, considering that Phoenix has been adding new head-to-head-competitive projects for years now. Market analysis is necessary case-by-case to determine the feasibility of BTR in any submarket in this market.
With the addition of thousands of units of a similar type (plus a large number of traditional apartments still under construction), it is important for developers in this market to consider the quality of their location relative to better-located existing rentals. This will be crucial as we head into 2024. Looking within the Phoenix market, the West Valley has been the locus of the largest share of construction activity, with strong performance being measured so far in Glendale, Peoria, Goodyear and Surprise. According to CoStar’s data, since 2016, about 35% of new multifamily builds in the West Valley have been for horizontal apartments, compared to about 13% for Phoenix overall.
Dallas-Fort Worth: Rapid Recent Expansion
The northern reaches of the Dallas metro area in particular are attracting a large amount of built-for-rent (BTR) development. Data from CoStar show that 1,056 horizontal multifamily units were completed since 2016 in the North Dallas submarket, which makes it one of the busiest submarkets in the country for this product niche. While this might sound like a lot of new residences, let’s put it into perspective:
1) The areas north of Dallas have seen a steady and strong in-migration for years, and the flow of people moving from California has only added to the demand here.
2) The 1,056 units have been delivered over a 6 and a half year period. If you divide that into years and then into months, that averages out to only 13.5 per month, which is about the absorption pace of one or two typical-sized BTR projects.
3) BTR projects there are doing very well, typically at 95%-98% occupancy, based on field work by Hunter Housing Economics.
So the demand is there to absorb the units that are being delivered. And the rents are often in the range of $2,500-$3,000 per month, averaging 17% above class-A apartments in the area.
Several BTR developments have either been developed, are in the process of being constructed, or are in planning stages. Many of these communities have well-known industry developers, including; Canvas, BB Living, and NexMetro/Avilla. There will be two incoming BTR units in the Painted Tree community (Avanta and Cyrene) which are expected to produce 580 units between the two communities, with delivery beginning in 4Q 2023.
Taylor Morrison has entered the Dallas market in a big way, with 7 projects under way in that metro area through their Yardly brand. In north Dallas, they have projects in Denton, Celina, Anna, and Melissa.
In all there are 3,839 horizontal apartment units and 1,414 rental townhome units under construction in the Dallas-Fort Worth market area.
In an interesting contrast between DFW and Phoenix, only 4% of the multifamily construction in DFW is of the horizontal variety, compared with 13% in the Phoenix market. This tends to suggest that Dallas has a longer potential runway ahead of it than Phoenix before it starts to show any signs of over-saturation in this product type.
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