Built-to-Succeed: How Built-to-Rent Developments are Well-Positioned in High Inflation / Interest Rate Environment

Prospective home buyers face affordability issues that are likely to get worse before they get better. Yet, homebuilder stocks are having a banner year. The cause? Existing homeowners, locked into low-interest rates, aren't selling. Available homes on the market fell to an all-time low in June, representing a 15% decline from the same period in 2022. But, new homes for sale aren't the only game in town. Built-to-rent (BTR) developments offer a key market opportunity for prospective homebuyers. 

For those prospective home buyers who can't afford the down payment just yet on a newly built single-family home, BTR developments represent a viable alternative. Similar to a newly built single-family home, BTR developments provide prospective homebuyers more space, better school districts, and a neighborhood feel. "Current single-family renters, who may have otherwise transitioned into homeownership in a low-or stable interest-rate environment, will likely remain in the renter pool in the current climate." (Northmarg, Single Family Built to Rent Poised to Thrive in the Next Cycle) Moreover, renters in BTR communities are "generally older and more affluent than traditional apartment renters, and the tenant pool consists of many "renters by choice" and aspiring homeowners." (Northmarg, Single Family Built to Rent Poised to Thrive in the Next Cycle) 

As levels of inflation and interest rates remain elevated and the labor market continues to be strong through 2023, the underlying fundamentals of BTR remain healthy. With purchasing power cut by both elevated inflation and interest rates, "prospective homebuyers will likely need to wait a little while longer until mortgage rates decline further." (Northmarg, Single Family Built to Rent Poised to Thrive in the Next Cycle) This lag should continue to support demand for BTR developments, particularly those newly built homes in strong Sun Belt markets. 

BTR developers are meeting this demand with unit deliveries up 20% in 2022 and construction starts rising by 25%. Moreover, as the BTR asset class continues to mature, lenders and investors are increasing their allocations to BTR, beginning to see BTR as a less risky asset or rather as a "horizontal multi-family" development. 

As this high inflation and interest rate cycle continues, BTR is built-to-succeed.