Are Built-to-Rent Suburbs the Next Big Trend in Residential Real Estate?
July 27, 2021
4 min read

The Covid pandemic has changed the way families are engaging with residential real estate markets, causing many to opt for larger square footage and more outdoor amenities. In addition, it has super-charged the movement toward suburban locations that was already well underway. However, these are not the only big trends in residential real estate. Another interesting development that is gathering steam is the ‘Built-to Rent Suburb.’ 

The traditional American Dream of owning a home has been evolving for decades. While that dream is certainly alive and well with many people, it is not the defining goal for everyone. This is evidenced, in part, by the growth of residential home rentals over the previous ten years. 

Real estate developers and investors are sensitive to the changing needs of consumers and are responding with greater options for renters. A recent Wall Street Journal article describes one new innovation called the Built-to-Rent suburb. As detailed in the article, “Investors have been buying up single-family houses to rent out for some time, typically in disparate bunches in communities where most people own their homes. Built-to-rent developments, however, are entirely new subdivisions designed for renters. 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.”

This evolving landscape is also being reflected in the demand for Aloha Capital’s lending business. Institutional money that we know and follow, continues to have seemingly endless capital and appetite for residential real estate. At a recent conference where we met 50 developers who are in the build-to-rent or own space, big money wanted to buy every house that these developers could build, as soon as they were completed.  We are currently putting together term sheets on deals ranging from 10 townhomes to 100+ Single family homes, which are being constructed in states ranging from Nevada to Florida.

An entire suburb built for the express purpose of home rentals is a relatively new concept. If successful, it could play well with groups that are already moving away from home ownership. As stated in the article, “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.” 

As we have discussed in the past, millennials are forming families and entering the single-family real estate market in greater numbers. That demographic is now the single largest source of demand for residential real estate. However, what we do not yet know is how this group will engage the marketplace. Will they choose home ownership, or will they opt to rent instead? Certainly, this demographic is more comfortable with the ‘sharing economy’ than the generations who preceded them. It would not be surprising to see this same dynamic play out in home ownership.

While millennials are entering the home buying market in greater numbers, they are doing so at a time when home affordability is reaching historical lows. As discussed in the article, “Prices are rising faster than ever, leaving more people, including those with higher incomes, more likely to rent.” Suburbs that are created for the rental market could potentially help satiate some of the current elevated demand for housing that we’ve been writing about for many months.

Millennials aren’t the only group driving demand. Baby boomers continue to be a significant source of it, also. Yet in many ways, their needs have changed. The boomer generation is living longer, living healthier and demanding access to outdoor activities and amenities. However, as they age, this group is less interested in taking on the maintenance responsibilities that come with owning a home. 

Built-to-rent suburbs could help satisfy these preferences and create a strong value proposition for this demographic as well. From the article, “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.” 

One of the interesting facets of this story is what increased home rentals could mean for wealth creation. Without question, generations of wealth have been created through the ownership of real estate – primarily in the form of the family home. However, starting with millennials, we now have a generation that has had a very complex and mixed experience with real estate. This generation has experienced a cycle that includes a housing boom, followed by a housing collapse and then subsequent soaring home prices – all within a decade or so. It will be interesting to see how many make the decision that owning a home is just not worth the hassle and the risk. However, that decision could have negative implications for future wealth creation.

As the saying goes, necessity is the mother of invention. As the strong demand for residential housing continues, the ‘Built-to-Rent Suburb’ is an interesting trend to watch. However, this phenomenon is still relatively new, and makes up a small percentage of the market. From the article, “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.” 

Most likely, individuals that own their own home will continue to constitute the largest segment in the residential real estate market. However, the move towards residential home rentals has a lot of momentum and comes with a lot of benefits. These rental suburban communities may come to play a significant role in residential real estate in the future.

Steve Sapourn
Steve Sapourn

Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.