I had the pleasure of going to the recent Build to Rent (BTR) Forum in Nashville, where hundreds of managers, developers, and investors gathered to learn about this rapidly emerging segment.
Two things struck me: first was how most are building a product that works on paper, then hoping they get the renters to fill it up. This isn’t unusual. In multi-family, money comes before the plan. Money, investor, site, proforma, buildings, customers; in that order. It’s no different in BTR. Second was how much struggle there is in figuring out operations, when applying multi-family best practices is the clear path of least resistance for this product type.
Sure, the buildings are, for the most part, stand alone, and not stacked flats. But other than that, the operational basics are the same. Staff sizes are greatly dictated by the unit count. Management of maintenance services and equipment are the same. Rent collections and lease renewal management are the same. Move-in and move-out is essentially the same (albeit maybe a little lengthier on the turn in single-family rentals). Think of your project as multi-family, and most of the confusion dissipates.
Operations aside, it’s really the proformas that are threatening the success of this product type. Why? Because no one seems to be asking the two most important questions on which to base their product and rent strategies:
“Who is my customer?” and “What do they want?”
One panelist even proclaimed, “Residents don’t know what they want”. I beg to differ.
While it’s true that data on single-family renter preferences is hard to find, it does exist. Sorting through all the search results talking about investor preferences and ownership trends to find good demographics information is no small feat. However, once found, the data that is available online, combined with the tens of thousands of resident surveys from the multi-family sector, can inform a great deal of your project features. NMHC and Brookings are great sources, for example.
So, who is the Build To Rent customer?
Contrary to the current dialogue around the matter, it’s not Baby Boomers. While there are certainly Boomers in this product, they are in the minority. For reference, Baby Boomers are all 60 years old or older. They for the most part are not selling their high-equity homes in established neighborhoods to move into mass-produced rental housing unless they’re buying another house and need interim housing. Furthermore, most Boomers are in their fixed income years, and not the most desirable for a thriving rental community. Yes, there are exceptions, but the numbers are too small to move the needle on design considerations.
The actual demographic is very similar to multi-family, except (not surprisingly) there are more kids in single family (rented and owned). According to NMHC, 43% of single-family renters have kids, while 30% of single family owners have kids and only about 20% of multi-family renters have kids. This supports the conclusion that people with children seek out more space in their homes and have other space-related requirements that aren’t as prevalent among multi-family preferences. More on preferences later.
Most people in single family rentals are singles, couples without children, singles with children, and couples with children. The numbers are spread fairly evenly throughout those groups. In contrast, singles and couples without children dominate the multi-family sector, while single family owners are more concentrated in the couples with or without children categories. The children in single-family rentals are school aged, and correspondingly the majority of renters range in age from 25-50.
Not surprisingly, renters for this product type are expected to remain mostly Gen Z and millennials for the foreseeable future. In fact, research suggests that Gen Z may be the most likely customer going forward, due to their preference for larger spaces, suburban environments, and better access to the outdoors.
Another important factor to consider is income. According to data from NMHC, the average household income for both multi-family and single-family renters aged 25-54 is almost identical at around $55,700 per year. Add the data for single-family owners, and that number jumps to about $88,700 per year, a 37% gap. Therefore, underwriting rents that are at mortgage rate levels means you’re trying to fill your project with a tiny sliver of the available renters for this product type. This income data alone supports the argument that renters are looking (by necessity) for lower payments than can be obtained with a mortgage, indicating a proforma with below-mortgage-rate rents is key.
Which leads us to question number two: What does the BTR customer want?
The short answer is the same for renters and buyers alike – location and price. A stellar location cures many ills, but once a location is identified, what do renters lean towards after affordability?
Not surprisingly, single family renter preferences mirror buyers’ preferences in many instances. These preferences also echo the age, income, and familial status of the target demographic.
- A yard, preferably fenced in, and a deck or patio.
- An attached garage and adequate parking for each occupant
- Tech-savvy features including smart thermostats, ring doorbells and/or security cameras, and electronic entries.
- Office space/spare bedroom(s)
- Kitchens with pantries, island/breakfast bar, and efficient appliances
- Storage (includes laundry room, clothing closets, and linen closets)
- Open plans, especially between living and kitchen.
Things like whether they prefer a townhome, cottage or standalone is dictated almost exclusively by affordability. Like homeowners, renters typically want the largest space that fits within their budget. As for finishes, the focus is on what is easiest to maintain and that holds up well under wear and tear from children and pets. That means vinyl over carpet, neutral colors, dependable appliances, ample lighting and outlets, etc.
As for amenities, single-family renters cite a fitness center and a pool as their must-haves, with Gen Z in particular favoring well-designed outdoor spaces. While project size and density requirements can often make a pool cost-prohibitive, maximizing the outdoor space for multiple uses and activities will go a long way to attract and keep renters in these developments. Note that a clubhouse is not on the priority list, and I think forgoing one makes a lot of sense provided outdoor areas are vigorously programmed.
I heard many single-family developers speak of how they look to competitors for what works and doesn’t, and while it’s convenient to benefit from someone else’s expensive lesson, it’s not difficult to avoid costly mistakes using your own due diligence. Start by considering the shadow market. What single family neighborhoods are near your project? What can someone expect to get from your community that they can’t get from an individually owned single family home? A good closet scenario is worth far more than 3cm granite or hardwood floors. A fenced yard is worth more than a huge master suite. Sidewalks to the school are worth more than masonry siding. Single family renters are not luxury renters, they are practical renters. With individual owners making up 73% of single-family rentals in 2018 (though that number is shrinking as investor interest grows), knowing the qualities of comparative individually owned properties is as important, if not more so, than knowing those of institutionally owned developments. New projects need to be smarter and offer the same basic features as that home in the established neighborhood next door.
Most developers know what numbers are needed to assess profitability. They have an underwriting model to populate and investor expectations to meet. But what’s in place within the project’s design that ensures these numbers are met? Everyone follows the capital, as they should and no doubt as they always will. But at some point, when enough underperforming deals get built, capital for this product type will wane, and what’s available will be redirected to those established players who have demonstrated their understanding of the market. Doing the minimum always works for the first guy, until the next guy comes in with fitness, garages, and a pool and suddenly “the minimum” can’t stay occupied without reducing rents. Avoid the costly mistakes by establishing some minimum project standards from which to base the proforma. And just as important, sort your standards in descending order of importance, so it’s easy to VE without threatening the success of the project.
There’s a better way and it comes from asking these two questions: Who is my customer? What do they want?
At Caryatid Consulting, we have the depth and breadth of industry expertise to help develop a build-to-rent project that works. Let’s work together.
