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BTR homes have continued to gain a strong foothold in the multifamily investment market across the US over the last few years. With continued demand for rental properties in the multifamily apartment and single family rental (SFR) sectors, the consensus is that BTR properties are well placed to continue to perform well as investments, and a great way to make income from real estate investing.
This week we thought we’d review the outlook for the BTR sector against a backdrop of strong demand for such rental properties but also, at least in the short term, a slowing US economy.
To recap, what is BTR?
BTR is the name given to purpose-built housing designed and operated for rent rather than for sale. It can comprise multifamily accommodation or single family rentals (SFR). These types of BTR projects usually offer longer tenancy agreements and are professionally managed by the primary investor or contracted to an operator. There will likely be a wider range of occupier based series or amenities than just space being rented.
BTR is well beyond its initial concept phases, with the business model having been successfully operating for a number of years, but the pandemic brought BTR properties, especially BTR-SFR into more focus and caused demand to increase dramatically. One reason for this was the significant migration away from dense urban cores to smaller cities and suburbs/lower-density neighbourhoods where BTR-SFRs are more likely to be found.
Having said this, it’s really been national, longer-term, demographic shifts which have been the key driver of demand for BTR assets.
Summary of outlook for BTR projects in 2023
There are a variety of factors in play which affect the outlook for BTR properties in 2023 and it’s necessary to sift through the positive and other news to form a balanced outlook—by the way, you can read about our top 10 forecasts for the US economy for 2023 here
Some key issues of note include:
Construction starts in the BTR sector are being driven by the ongoing demand for single-family rental units as high mortgage rates and limited for-sale inventory push home-purchase prospects further out of reach of many would-be homebuyers;
Relatively high interest rates
With rates being increased to combat inflation, this may pose some threat to the access to capital, the cost of materials and labour;
Development and operating margins may be compressed
In addition to slowing growth rates as leases turn over, they also have some property taxes and cost structures have increased materially, thereby squeezing operating margins and investment returns;
Demand will be sustained:
The overall supply of BTR units increased to around 74,000 in 2022, up from 59,000 units in 2021. However, amongst other things, rising mortgage rates on new-home sales mean that the BTR sector will still see strong demand and become a larger segment (currently only 6%) of the overall single-family housing market (estimated at some 14 million homes nationally).
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Due to a combination of economic uncertainty and interest rates being rather higher than they were a year ago, some developers will hold back. Therefore, there is likely to be a reduction in annual supply of multifamily and BTR properties nationally by as much as 25-30%, further exacerbating the national housing-supply shortage. In round terms from 1.5 million homes per year will drop to around 1.0 million homes.
More acquisition opportunities
The softer for-sale new-home housing market offers the chance for BTR-SFR rental operators to acquire blocks of new homes, with finished lots and larger land parcels from homebuilders;
Major players entering the BTR market:
Well-known investors and operators such as Tricon Residential and Progress Residential introduced initiatives in 2022 announcing that they have thousands of build-for-rent homes planned for development or already in the construction pipeline — some 12,000 on a combined basis. Furthermore, JP Morgan Chase & Co. and partner Haven Realty Capital recently announced a $1 billion joint venture to buy and develop BTR-SFR properties.
Other SFR homebuilders are also looking to capitalise on the BTR market, with Lennar Corp, one of the nation’s largest homebuilders, recently offering to sell some 5,000 homes in the SFR market;
Rental growth may moderate in some locations
Despite growing demand for BTR-SFR properties, the double-edged sword of higher interest rates and stubborn inflation plus the prospects of a recession later this year (however short it may be) and with it, rising unemployment (possibly to 5.5%) there may be some moderation rents in rents overall, although certain BTR markets remain and are likely to stay buoyant; many of the southern sunbelt states ie Florida, a long-time favoured multifamily and BTR are likely to be relatively insulated from any slowdown;
Enhancement of amenities:
The evolution of amenities being provided for residents will continue, especially those multifamily or BTR projects targeting millennials who are used to living in apartment complexes with facilities.
CPI Capital remains confident that multifamily and BTR projects will continue to prosper, provided the necessary due diligence and research into the chosen markets is comprehensive. After all, people need housing, a place to live, and it’s simply a question of investing in the right product to attract them, whether it be properties with yards and garages or simply larger living units.
Renter demand for these homes is being fuelled by demographic and social trends which are here for the long term (the “silver tsunami”, affordability and millennials). Importantly, occupiers are expected to continue to demand new multifamily or BTR rentals, particularly as the affordability of for-sale housing grows further out of reach.
CPI Capital appreciates that 2023 might have its issues economically but it does appear that the short- (say 6-9 months) and medium-term outlook for BTR-SFR offers a great way to make income from real estate investing .
CIO, Co-Founder CPI Capital