Demographic and economic trends likely to support the growth of the rental construction industry
Institutional investors have grown increasingly interested in the build-for-rent (BFR) space over the past five years. But the pandemic has spilled gasoline on an asset class that offers tenants space, privacy and the flexibility of tenancy. Now that COVID appears to be receding in some regions, can the BFR sector maintain its growth? Paul Garner, director at Walker & Dunlop, believes demographic and economic trends will maintain demand for WCR, particularly in the Sun Belt states, for the foreseeable future.
Growth opportunities and focus on the Sun Belt
Garner sees the greatest potential for the growth of RFB in suburban areas, particularly those located 15 to 20 minutes outside of a metropolitan statistical area. Economic growth and population increase in neighboring cities determine whether suburban BFR setups will attract tenants.
According to Garner, Walker & Dunlop’s dedicated BFR / Single-Family (SFR) rental team started seeing a lot of similar action to what they saw on the West Coast (especially Arizona) four years ago. or five years. He notes, “BFR properties are becoming increasingly popular in all of the Sun Belt states, particularly Florida and the Carolinas. There is potential in this area to get land very, very cheap compared to what you would pay on the west coast.
Garner explains that this focus on the Sun Belt has led to two results: “First, we are starting to see new entrants. Many more multi-family owners / operators at market rates who have occasionally ventured into development have started to move into the BFR space.
“Second,” Garner says, “well-capitalized groups that were originally the first to settle on the West Coast are starting to buy land and develop absolutely whatever they can in the Sun Belt states. “.
To find out more about SFR and BFR in general, find out more about these asset classes here.
Factors driving continued interest in rental construction properties
In many cases, the rising cost of housing in prosperous cities makes nearby BFR properties much more attractive to millennial tenants, who may not have the equity to purchase homes in popular and densely populated areas. where house prices continue to rise. Garner explains that the amenities, sense of belonging, and overall low cost of living of BFR communities – initially intended to appeal to retirees – often attract Millennials.
The properties attract tenants even at a higher price than traditional multi-family dwellings; Garner notes that the BFR sector experienced an annual growth rate of 6 percent last year.
“I see the BFR trend continuing and continuing, no doubt, for the next five years or so. We need more affordable living solutions, ”Garner says. He notes that the gross price of BFR houses is generally higher than, for example, a three-bedroom, two-and-a-half-bathroom apartment. But he says the lack of supply of homes in the United States and the high price of those homes that are for sale are helping to channel more people into the BFR product.
Funding of BFR Communities via the Agencies
As the WCR space has evolved, the sources of capital have also evolved. Banks, debt funds and some life insurance companies have entered the BFR loan market. Freddie Mac and Fannie Mae have become active in space. Agencies see BFR as a horizontal multi-family project and therefore treat it (except for certain subscription variations) a bit like a conventional vertical apartment ownership.
Garner says, “The Walker & Dunlop team currently invests in construction debt, bridging debt and standing debt, as well as programmatic joint venture (JV) equity and has extensive experience across the group in composition and negotiation of highly structured BFR solutions, if necessary, for our clients.
“For fundraising purposes, GSEs like to see that the BFR community is noticeably separated from nearby developments or homes that are not part of their community,” Garner explains. “It also helps if the BFR community has its own separate entrance and signage. If the BFR units carry a few unique designs that are unlike any property for sale nearby, that’s a plus point as well. The project must be purpose built and must function as a rental community from the start of construction.
Garner further explains how agencies view these assets. “The BFR community is often located on a single tax plot. If the BFR development consists of detached houses on separate tax plots, each plot or lot must aim to be contiguous, although certain exceptions may be granted. GSEs will typically pass on funding for properties that were originally built for sale and then the remaining homes have been converted to rentals. Isolated and non-contiguous BFR communities cannot currently be funded by GSEs. “
“BFR communities should also have facilities shared within the community in question, unless the location is full, in which case it may not make economic sense for the facilities to exist,” Garner explains. “The agency’s minimum loan amount is $ 6 million and an HOA in place just for the community itself is recommended, not including other ‘unsecured’ outside components.”
Garner describes a recent deal, Pepper Hall Townhomes, a 121-unit BFR construction for lease project located in Bluffton, SC Garner has arranged both debt and equity financing for land acquisition, development horizontal and vertical development of Pepper Hall Townhouses. He identified a JV equity partner to co-invest with the sponsor and advise in the construction process, if necessary. Separately, Garner secured, negotiated and closed a $ 22.2 million acquisition, development and construction facility on behalf of the sponsor.
The role of regional home builders
As the BFR space has grown, Garner sees regional home builders transitioning to the space. “I think in order to get the financing right you have to show that you can build townhouses, especially townhouses. You have to do a great job and deliver on time. What we have seen by observing these groups and helping them transform into portfolio, business owners is that joint ventures and partnerships are latching onto their regional segment of housing construction and temporarily reallocating more effort. the development of BFR. Rather than recruiting staff on the BFR side, they create a company in partnership with a BFR or SFR operator. This is a great way to double the amount of production as it allows home builders to do what they’re great for and what lenders were initially looking for with aggressive loan terms.
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