Amid property gloom, US homebuilders see rentals as bright spot

Washington

TODD WOOD sold his commercial-baking business for US$120 million and weighed plans to get into real estate. He then decided that most existing business models were the equivalent of residential white bread.

Eventually, he hit on an appealing recipe. Instead of building homes for suburban buyers or apartment renters, he would develop communities with elements of both: detached rental homes with small footprints and high-end amenities, aimed at downsizing baby boomers and student-debt laden millennials.

Christopher Todd Communities, his new company, built more than 450 homes in the Phoenix metropolitan area last year.

It also signed a US$100 million debt commitment with alternative-investment manager Varde Partners in what Mr Wood describes as an initial step to taking the company national.

"We want to be the largest branded single-family developer in the country," he said. "In 10 or 15 years, we would love to have 300,000 or 400,000 homes."

That optimism highlights a divide in the US housing market. Sentiment among homebuilders is souring as they worry higher interest rates will further stretch buyers in places where real estate has already become too expensive.

At the same time, companies that build rental houses are emerging as a bright spot, raising new capital to accelerate growth on a bet that its easier to lease homes than sell them.

The new wave of rental builders includes AHV Communities, which has developed rental projects in Texas, and BB Living, are focused in the Phoenix area.

NexMetro Communities, credited by many in the industry with pioneering the hybrid home-apartment model, will break ground on US$300 million in projects this year.

Building homes with the intention of selling to rental operators is also gaining traction with some traditional homebuilders, said Ryan McBride, the chief operating officer at CoreVest American Finance Lender.

The company is currently evaluating a loan pipeline of more than US$300 million in its build-to-rent programme.

"It helps that there's a ton of demand," said Rick Palacios, the director of research at John Burns Real Estate Consulting. "It's hard to find a build-to-rent community that does not do fantastic."

Builders constructed 43,000 attached and detached single-family homes for rent in the 12 months through September, 30 per cent more than the year before and the highest total since 2004, according to census data tabulated by Mr Palacios' company.

That qualifies as fast growth off a small base, but purpose-built rental homes are a good match for a housing market that is slowing after tight inventory helped push prices beyond the point of affordability for many buyers.

The typical home built for rental in 2017 was 1,463 square feet, 66 per cent smaller than the median size of all new single-family homes, according to the most recent census data.

Builders specialising in the rental market say they are using more efficient materials and construction methods.

"We approach our sub-divisions more like a horizontal apartment complex," said Craig Lonsdale, chief executive officer of Tricor, an Arizona-based company that builds with a wall-panel system that is faster and more energy-efficient than traditional framing.

"We don't have to worry about buyers picking colours. It's really an advantageous way to build."

When Tricor opened for business in 2014, the company focused on renovating homes for a new class of institutional landlord as firms such as Blackstone Group and Tom Barrack's Colony Capital amassed homes in the aftermath of the foreclosure crisis.

As landlords in the nascent industry showed appetite for new construction, Tricor moved to meet it.

In January 2018, Mr Lonsdale's company started selling homes to Cerberus Capital Management, one of the largest owners of US single-family rentals, and later hired Whelan Advisory to raise US$100 million to develop more rental projects.

New rentals are still a small part of the single-family industry, and are likely to stay that way because institutional investors can often acquire rental houses for below replacement cost, said Sandeep Bordia, head of research and analytics at Amherst Holdings.

But landlords like purpose-built rentals because they are easier to maintain and can be configured to meet renter preferences.

Mr Wood, who sold Alpine Valley Bread Company to Flowers Foods Inc. in 2015, said his communities differ from many single-family rentals because they are concentrated in one place, making it easier to maintain a high level of service.

He sees a similarity to the bread business, where he attributes his success to offering organic goods at a time when supply had yet to catch up with consumer demand. "We're creating a new category within real estate," he said. "This format is an outlier, but it resonates to me. There is so much public demand for it." WP