Wall Street fell in love with build-to-rent during the pandemic frenzy. That honeymoon is over

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Between 2005 and 2018, the share of single-family homes under construction built expressly for renting rose from 1.5% to 4.4% as the build-to-rent business model slowly gained momentum. The easy-money era during the pandemic, with cash-flush Wall Street firms seeking assets to buy, of course, only added fuel to the fire. By Q4 2022, Zelman & Associates estimates that build-to-rent made up 8.8% of single-family starts.

That 2022 figure will be a high-water mark for now, as spiked interest rates have translated into a pullback in build-to-rent projects that will be reflected in the data over the coming quarters.

"A lot of those [recent build-to-rent] starts were purchased and financed a year or two years ago," Ivy Zelman, CEO of Zelman & Associates, a research firm which exclusively studies the housing industry, said in a recent chat with Oxbow Advisors. "We expect to see [build-to-rent] deceleration. It just isn't penciling now. We're seeing build-for-rent developers that are trying to sell a lot of communities to builders for the for sale market because of the challenges with higher cost debt. We see that market right now under a lot of pressure.”

Zelman then added “but don't expect it [build-to-rent] to go away.”

Charles Tourtellotte, the CEO of LaTerra Development, is one developer determined to move forward despite the industry pullback.

LaTerra Development, one of the largest real estate developers in the Southwest, specializing in multifamily residential and self-storage, has recently partnered with Revitate to commence construction on Bedrock. This new build-to-rent community in Albuquerque, New Mexico will consist of 142 single-family detached homes and 202 townhomes. The community will offer various amenities, including co-working spaces, pet-friendly parks, BBQ areas, pools, fitness centers, and spas.

Why is LaTerra Development moving forward with this build-to-rent community despite the build-to-rent slowdown? One reason is that they aren’t loading up on debt—which is a barrier for many other projects—just yet.

"Funding is the story today” Tourtellotte tells ResiClub. “It’s not exclusive to build-to-rent, it's most [real estate] asset types including multi-family apartments, everything has about ground to a halt. It's the cost of capital, it's the capital flow, that has caused that to happen.”

While Tourtellotte says they “haven't elected to do debt financing” on this build-to-rent community, they’ll “eventually layer in some debt” before it’s completed in 2025 or 2026.

“The common sentiment in capital markets is that there will be some relief in the coming year. When we see it's a good time, we'll put a loan on it,” Tourtellotte tells ResiClub.

A few years ago, Tourtellotte flew into Albuquerque from L.A. to look at an apartment property to buy. That’s when he first realized build-to-rent might make sense.

“Our price [on the apartment] wasn't competitive, but when we were walking with the manager, he said 'hey look Charlie, you ought to consider, because we know you're a developer, if you did build-to-rent I could lease them faster than you could build them. Just look around at this [apartment] building, it's full of millennial families with kids and pets and they're all looking for something bigger,” Tourtellotte recalled.

The fact that so many millennial families, with strong incomes, will be looking for more space over the coming decade is why Tourtellotte thinks there will remain a need for more build-to-rent communities across Sun Belt markets. The only problem, he says, is that elevated interest rates make it hard to pencil.

Tourtellotte says interest rate relief is the primary thing that would have to occur to spur more build-to-rent projects.

Note: Some industry folks like Ivy Zelman call it “build-for-rent,” while others like Tourtellotte call it “build-to-rent.”

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