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A housing shortage, rising home prices and prohibitive interest rates are putting a spanner, or a wrench, in the housing market. But, as a result, the ease of renting over home-ownership is making developers of build-to-rent projects an ally to the short-term rental industry.
What’s in it for these developers? A stable revenue stream via rentals and a possible chance to get regulators off their backs.
“There is a lot of interest among investors for real estate meant for short-term rentals,” said Dustin Abney, chief executive officer at Portoro, a property management company for premium vacation rentals. “And when they look to invest, they want purpose-built homes. There are cases where communities in South florida have been re-zoned to have short-term rental protections.”
He also pointed to another example where in La Quinta, California the city council approved for a community called Polo Villas to be zoned as short-term vacation rentals.
Abney, whose firm bought properties in build-to-rent communities, called this a win-win-win situation for renters, real estate investors as well as developers — renters have more inventory to access, developers build more such homes backed by investors who believe in this business model.
Short Supply
There were fewer new homes built in the 10 years ending in 2018 than in any decade since the 1960s. By 2019, a good estimate of the shortage of housing units for sale or rent was 3.8 million in the U.S., a recent Fannie Mae study found. The pandemic made things only worse: construction and labor costs went up, and so did interest rates and mortgages.
By some estimates, developers will need to build 2.5 million homes every year just to make up this shortfall over the next decade.
Given this environment, some real estate developers veer towards creating purpose-built homes exclusively for renting — there were approximately 21,000 single-family build-to-rent starts during the second quarter of 2022, a 91 percent increase compared to the second quarter of 2021, according to the National Association of Home Builders‘ analysis of the Census Bureau’s Quarterly Starts and Completions by Purpose and Design.
U.S. Census data also suggests that close to 5 percent of all single-family houses that developers have started to build last year, were planned as rentals and six percent of lots and land purchased by homebuilders in the last quarter of 2021 were bought by build-to-rent companies.
And this has naturally led builders to find property managers to rent and manage the units.
“We are seeing a big demand from build-to-rent communities,” Roman Pedan, chief executive officer at Kasa Living, which manages rentals for owners of multifamily and boutique hospitality properties. “Because some of these homes were built to sell, but the developers want to find a way to rent them,” he said.
Pedan noted that a lot of realtors and developers want to build such projects because they are more confident of the business model. “The thing that makes it exciting is that developers can program these communities that can intentionally have flexibility in them and have amenities designed for short-term rentals,” Pedan said.
Pedan said that Kasa Living, founded in 2016, sits at the intersection of real estate, hospitality and tech.
Transient Communities
In addition to being a possible solution for housing crises across the world, build-to-rent projects tend to work better for diverse groups of audiences: the mobile millennial, the retired upper middle class baby boomers, as well as transient migrant workers and labor that require temporary accommodation.
Housing demand surged during the pandemic, and about 36 percent of renting households (roughly 16 million people) have ditched their multi-unit apartment complexes to rent single-family homes.
Where are these being built? In the U.S., Las Vegas, Houston, Tucson, and Phoenix currently have the most built for rental housing. Cities that are adopting built to rent communities at the fastest pace include Phoenix, Columbus, Dallas, Houston, Riverside, Las Vegas and Kansas. These are also markets that have seen the most construction of single family homes.
“We will see more purpose-built homes and communities for short-term rentals,” Abney said. “The newer generations don’t aspire to home ownership, plus, you also have this aging upper middle class who cannot afford a home and want to rent.”
As more such communities proliferate around the country, developers are vying for partnerships with property management companies such as Portoro and Kasa Living.
“There is demand for build-to-rent communities, and if the partnership with property managers works well, there will only be more demand for property managers to work with developers,” said Adam Littlefield, senior vice president of real estate for Investment.com.
The Route Around Regulations
The close interaction with short-term rentals means entering the danger zone of regulations, zoning issues and permits.
Even as these build-to-rent communities present a possible route around regulations, developers cannot completely do away with dealing with regulators.
Littlefield, for one, believes it will be harder in the beginning, until supply and demand are corrected. “In the short-term, there will be more regulations against such communities,” he said. “Because people want longer-term housing, but there will eventually be enough common ground where regulators will become friendly to that type of development.”
According to Mike Kaeding, the chief executive officer at Norhart, a Forest Lake, Minnesota-based company that builds, designs and rents apartments, regulations aren’t universal.
“It’s more about if the city likes you and is OK with your project,” Kaeding said. And the way to hedge some of these bets is to have a couple of back up plans.
“You put a couple of land sites in a purchase agreement within a certain time,” Kaeding explained. “Some will be approved, some won’t — For the ones that don’t get approvals you back out of the deal.”
Kaeding is among real estate developers who are focused solely on increasing housing supply in a risk-averse manner suited to the changing attitudes in home ownership.
“The end game is solving housing affordability,” Kaeding said. “We are ultimately trying to solve housing affordability. The industry is segmented. By bringing everything together, we can reduce cost,” he added.
Pedan of Kasa Living stressed that if real estate gets built for flexible use, more inventory gets built, which will eventually allow housing prices to correct.
“The solution to the housing crisis is building more housing,” Pedan said. “Regulating short-term rentals in a negative way ensures housing supply drops.”
Pedan gave the example of Austin, which regulated short-term rentals and is among the top markets for new home construction.
Even as this might be true, critics including housing economists, say build-to-rent establishments exacerbate already existing inequalities by replacing entry-level homes with rentals making homeownership even more elusive for some.
Because rents are constantly rising, renters can often end up paying for housing than homeowners.
“Rental payments don’t go into building equity, which is a significant portion of most Americans’ household wealth,” Daniel Pang, at the Urban Institute’s Housing Finance Policy Center was quoted as saying in a Washington Post report. “Homeownership is a vehicle, a pathway, through which a bunch of privileges can be delivered. … It always has been.”
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