A New Approach To The New U.S. Housing Reality

MEA Finance, 2021/11/10

The housing market in the U.S. has been hot property for well over a year already. With land increasingly hard to come by and mortgage rates still at near-record lows, demand has surged since the start of the pandemic – and with it, home prices.

Sentiment has moderated to some extent more recently. Pending home sales, for example, dipped in July, marking two consecutive months of declines, according to the National Association of Realtors[1]. Yet supply remains constrained.

As a result, affordability continues to suffer. In turn, this is leaving a growing number of potential homebuyers with little choice other than to delay ownership.

The latest results from the Beracha, Hardin & Johnson Buy vs. Rent Index, for instance, show prices at or near their peaks in Dallas, Denver, Houston, Kansas City, Seattle and Miami[2]. Renting is therefore a more viable option.

Meanwhile, another leading indicator, the quarterly John Burns Real Estate Consulting (JBREC) / National Rental Home Council (NRHC) Single-Family Rental Market Index, remained near its record highs in the second quarter of 2021[3]. At 84, the index is sharply higher year over year from 76.

“The U.S. homebuilding industry continues to adapt to different opportunities and challenges accordingly, in line with this trend towards the single-family rental market,” said Tim Haywood, Regional Vice President, Middle East at Walton International Group, the real estate investment and land asset management company.

Tim Haywood, Regional Vice President, Middle East at Walton International Group
A new way to plug the housing gap

An ever-more appealing option, both on the construction and consumer sides, is the concept of single-family build-to-rent (BTR) homes.

In particular it appeals to aging millennials, who prefer to rent a home before they transition into family formation years. At the same time, the pandemic fuelled the demand for extra space, stemming from work-from-home policies which has shifted thinking away from long-held notions of the importance of being close to downtown locations.

This test in the wake of COVID-19 has led to strong financial performance and occupancy growth in the single-family rental home sector.

Based on the largest public, single-family rental and BTR transactions, for example, JBREC estimates total 2021 deal volume in the first six months of the year to be over $18 billion. Equity investment in the space is expected to grow in 2022 and 2023[4].

Tapping into new growth potential

This trajectory has attracted many players to the BTR landscape. However, being able to deliver value to the market and, ultimately, investors, requires a mix of several differentiators: available land, experience in development of lots and a vast network of homebuilding relationships.

“Many organizations entering the BTR space are making value propositions based on a business plan or a concept and are struggling to deploy capital. Walton has a defined portfolio ready to go with partnerships in place and a diverse land pipeline that we continue to grow,” said Haywood.

As of mid-2021, for example, Walton had already identified 17 near-term opportunities in this space, across a range of locations across the United States.

“We are in advanced negotiations with a select group of nationally recognized builders and developers to construct BTR communities for approximately 2,500 units throughout the country,” explained Haywood.

Walton has also formed a joint venture with a private commercial real estate investment firm, SVN | SFR Capital Management, to build and operate BTR single-family residential communities nationwide. Colorado and Texas are target markets initially. Pending future announcements with other JV partners are expected.

In Colorado, where Walton has 3,000 of its 81,000 acres across the U.S, hundreds of new single-family rentals are in the pipeline. Target projects include a 100-acre land project in Lochbuie, northeast of Brighton where, of the 600-or so homes to be built, up to 125 could be single-family rentals. In addition, a 254-acre land project in the northwest corner of Loveland is likely to lead to the construction of roughly 1,000 homes, with anything from 10% to 15% allocated to single-family rentals.

Reshaping the U.S. housing sector

The roll-out of master plans across the country is happening at a critical time in the housing sector’s recent history: when affordable housing has been hard to come by because of soaring home sales prices since the start of the pandemic.

Although this is an initial wave of development, it forms part of a longer-term vision for Walton to grow a BTR portfolio. “We plan to construct additional projects within our network of more than 180 master planned communities and through new land acquisitions,” added Haywood.

Ultimately, succeeding in this space relies on owning the land to bring single-family rentals to market as fast as possible. This plays to the firm’s core strengths of pre-development land research and acquisition and land development. With a core focus on land acquisition, zoning and entitlements and partnering with top national homebuilders in the process, build to rent enables the firm to use its existing properties to provide additional single-family home inventory to growth markets throughout the U.S.

In parallel, the initiative also helps tackle the supply shortage and creates new routes to returns for investors in this space.

“We recognize land is a high commodity for builders and single-family rental companies to enter this space. We are a natural partner for them,” added Haywood. “For investors, this brings the potential for institutional-scale and quality not readily available in the BTR market.”