Built-to-Rent Suburbs Are Poised to Spread Across the U.S.
Jun 9, 2021
For some residents, the gated community in the Arizona desert is their first go at suburban living. The 222 houses have tile roofs, garages and white-fenced backyards where residents host barbecues and their dogs play. But these aren’t forever homes, or even starters: They are one- and two-bedroom rentals, with rents starting at $1,420 a month.
This is the Happy Valley subdivision, located 30 miles outside of Phoenix, that was built for renters from the start.
Investors have been buying up single-family houses to rent out for some time now, typically in disparate bunches in settled communities where most people own their homes. Typically tenants have absentee landlords with a slap dash approach to property management.
However Built-to-rent developments, are entirely new subdivisions designed for renters from the get go. They are managed more like new apartment buildings, with designated staff for repairs and maintenance. In the past few years, the model has taken off around Phoenix and elsewhere—and is likely to become a dominant force in the rental housing market in the coming years, with implications for the communities that surround them, and the nature of home ownership.
Betting billions on rentals:
Today, built-to-rent homes make up just over 6% of new homes built in the U.S. every year, according to Hunter Housing Economics, a real estate consulting firm, which projects the number of these homes built annually will double by 2024. The country’s largest home builders are struggling to pivot their business model for that future, leaving the field open for specialist niche operators, such as Nexxus Developments in this sector. Backed by banks and private investment firms, such nimble companies will put down some $40 billion during the next 18 months. Built-to-rent subdivisions have been constructed or are under development in nearly 30 states.
Homeownership is expected to decline over the next two decades—a trend that started with the generation after the baby boomers, according to the Urban Institute, a Washington, D.C., think tank that advocates for homeownership. Prices are rising faster than ever, leaving more people, including those with higher incomes, more likely to rent.
Built-to-rent subdivisions are attractive to some urban apartment renters who want to move to the suburbs but are unable or uninterested in buying a home. Many young professionals and families are less keen than their parents in being tied down by a 30-year mortgage, according to real-estate analysts, builders and tenants. They want the flexibility of renting and the freedom that comes with being able to pick up and leave after a lease. As they age, they may want the yard, garage, good schools and roomy basement, without the headaches of mowing that yard or buying a new motor when the garage door breaks.
These economic forces and generational preferences are creating a new kind of housing: the landlord suburb. Monthly mortgage payments that would be a resident’s equity are now income for real-estate companies. Thousands of homes that might ordinarily be controlled by homeowners—landscaped, renovated or otherwise customized (within the rules set by a homeowners’ association)—are instead professionally managed by real-estate companies, which typically handle everything from repairs and landscaping to drawing the line on what neighbors can put on their lawns. “I am the president of your HOA,” as a Nashville developer and landlord puts it.
What becomes of the suburbs if, one day, homeowners are outnumbered by renters? For one, the suburbs may become more transient places where residents move in and out more often, industry experts say. Tenants of single-family homes typically stay around longer than apartment renters, but tend to move sooner than homeowners, who stay for an average of seven years. “They’re not going to plant an oak tree,” says real estate consultant John Burns, referring to built-to-rent tenants.
Some think a transition to rent won’t mean an end to building wealth through suburban property ownership, with potential in fractional ownership models, such as neighborhood real-estate investment trusts. In these structures, people would own stock in companies that hold commercial and residential properties in their area. “We need to be thinking more about different ways that people can still own the communities that they live in, outside of the primary residence model,”
“We didn’t want to get into homeownership,” says Jim Pit, a 29-year-old nutrition and lifestyle coach. He and his wife, Ann who works in fitness retail, relocated to a B2R community in Goodyear, Ariz., this past year. Mr. Pit says it was wanderlust and a love of the mountains that drew the couple and their dog from the Chicago suburbs. For now, the couple’s financial goals are focused on paying down existing debt. “We still want to travel and don’t want to have to maintain a house,” Mr. Pit says.
Welcome to (rental) suburbia:
The look-and-feel of rent-only subdivisions vary from their HOA-governed neighbors. There are no for-sale signs. And there are no for-rent signs, either, because would-be renters go through an in-person or online leasing office. Some, like Mr. Pit’s neighborhood, are built to look more like garden apartment complexes, resulting in compact and uniform layouts. Others mix up facades and color palettes to give neighborhoods a less cookie-cutter feel. On the interiors, builders opt for more durable materials, meant to last for the duration of their long-term investment. That can sometimes mean higher-end finishes, such as granite countertops. It can also mean less traditional options, like vinyl floors.
Residents in some of these subdivisions are more likely to have dogs than children, which means doggy doors and poop-friendly artificial turf are common.
Another barrier is opposition from local governments and from homeowners, who have a tendency to view rental properties, even if indistinguishable from their own homes, as bad for residential property values, builders say. The town of Stockbridge, Ga., an Atlanta suburb, temporarily banned the construction of new rental properties while it seeks to change zoning laws that would permanently stifle built-to-rent projects. But these impasses have done little to slow down the sector’s overall growth.