Comment: Build-to-rent could be affordable housing solution

By Conor Sen / Bloomberg Opinion

The market for single-family rentals is changing. What started as a way for investors to buy up foreclosures in the wake of the 2008 financial crisis is turning into a full-fledged asset class. Investors are now working with developers directly to produce build-to-rent homes that have a physical appearance closer to a suburban neighborhood, but are marketed to renters rather than owners.

One interesting way this might change communities is through a reduction in the “not in my backyard” mentality that leads homeowners to oppose the construction of new or higher-density housing. Rather than a bunch of individual homeowners concerned about their own property values, there might be a handful of corporate owners of properties, with their tenants seeing more construction as a way to lower rents at the expense of wealthy institutional owners.

The early growth of the single-family rental industry in the 2010’s had all the hallmarks of vulture capitalism. Millions of people lost their homes to foreclosure, home values fell and properties were sitting vacant and unmaintained. Investors took advantage of low prices and cheap financing to buy properties, fix them up and rent them out. It was a wealth transfer from the middle class to the wealthy that contributed to inequality, though at the time it may have been the best option with the federal government unwilling to provide financial support to people facing foreclosure, banks on the verge of insolvency and dormant properties causing concern in neighborhoods.

While the single-family rental industry, if you can call it that, may have had dubious beginnings, as it’s matured over the past decade it has looked for new ways to find efficiencies and growth suited to the economic environment of 2021. There’s no longer a glut of cheap foreclosures to buy; the housing market has the opposite problem with historically low levels of inventory. And managing a portfolio of heterogeneous properties that were bought opportunistically across a metropolitan area has its challenges when it comes to creating economies of scale.

That’s where build-to-rent comes in. The opportunity for institutional investors in the housing market isn’t in buying homes right now, it’s in building them. And if you can create a standardized product in one location, that’s cheaper than producing a bunch of customized homes, and it’s cheaper to manage and maintain over time as well. It’s why homebuilders like Lennar and DR Horton have embraced the trend and are building rental communities.

In addition to being a good business opportunity — at scale, it’s cheaper for institutional operators with an army of contractors to do property upkeep than it is for individual homeowners who aren’t experts in home maintenance — it also means different incentives when it comes to development in local communities.

In a neighborhood full of single-family homeowners today, if a big apartment complex is proposed by a developer, nearby residents will probably show up to local government meetings concerned about the impact of the additional housing supply on their home values. Homeowners who go to those meetings are also highly likely to be voters, which puts pressure on local politicians to deny such developments. This is the NIMBY mentality — not in my backyard — that has contributed to housing shortages and high home values all across the country.

But in a build-to-rent community, the proposition of additional high-density housing means potentially lower rents for existing tenants rather than a loss in home values. To the extent lower home values are the risk from additional development, it would be borne by the institutional landlord of build-to-rent communities, and there would be few tears shed if the Amazon-equivalent of build-to-rent saw its portfolio decrease a bit in value because of the construction of a few more homes.

While economists, policymakers and activists are focused on ways to make it easier to build more homes, particularly in those places that are in high demand and have lots of economic opportunity, the growth of the build-to-rent market is a backdoor, market-oriented way to make it happen. Institutional managers of build-to-rent communities can perform upkeep and maintenance cheaper than most homeowners can. With all else equal, that should mean lower housing costs over time than in a world where homeowners are trying to figure out maintenance as problems come up. And by shifting ownership to a handful of institutional owners rather than millions of individual owners, the politics of housing construction should become easier at the local level.

To the extent a shortage of affordable housing is a pressing national concern, build-to-rent might be the answer.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He’s been a contributor to the Atlantic and Business Insider and resides in Atlanta.