Wall Street Firms Bet Big on Single-Family Rentals

Wall Street firms are increasingly investing in or constructing single-family homes, targeting individuals like Adrianne Harlow, a 45-year-old women’s basketball coach. Recently relocating from Alabama to Florida with her infant daughter, Harlow faced high prices and steep mortgage rates. She ultimately chose to rent a spacious four-bedroom home in Oak Grove, part of a single-family rental community owned by Main Street Renewal, a subsidiary of Amherst. Harlow is content with her decision: “I’ve made it my home,” she said.

Millennials Shift Toward Upscale Rentals

As millennials enter their prime home-buying years and start families, many find themselves priced out of suburban neighborhoods with top-tier schools. In response, an increasing number of individuals are opting for upscale single-family rentals. Developers, keen to meet this demand, are prioritizing rentals over homes for sale. AvalonBay Communities, one of the largest multifamily real estate investment trusts (REITs), has joined the build-to-rent market with a $49 million acquisition of 126 townhomes in Bee Cave, Texas.

AvalonBay’s $1 Billion Investment Plan

AvalonBay, while still early in its build-to-rent endeavors, plans to invest over $1 billion in this market. Matt Birenbaum, AvalonBay’s Chief Investment Officer, notes that the company is tapping into what could become “a significant, almost new asset class.” AvalonBay’s venture into this market reflects the growing wave of institutional investors, including Blackstone, Invitation Homes, and Pretium Partners, which are capitalizing on the expanding demand for rental housing.

Surge in U.S. Renter Households

From 2021 to 2023, the number of build-to-rent housing starts surged, reaching 10% of all single-family housing, according to the National Association of Realtors. This shift is due in part to the rising costs of homeownership, as mortgage rates hover near 7%. Redfin’s analysis reveals that renter household formation grew 2.7% in the third quarter, outpacing homeowner growth for the first time in over two years. The widening affordability gap between renting and owning is driving this trend.

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Sunbelt States Become Build-to-Rent Hotspots

The Sunbelt states, including Raleigh-Durham, North Carolina, and Austin, Texas, are seeing an influx of build-to-rent developments. Consequently, developers and investors are drawn to the region due to land availability and population growth. AvalonBay, traditionally focused on coastal markets, is expanding its build-to-rent efforts in these areas. Suburban developments like AvalonBay’s terracotta-roofed homes in Bee Cave offer desirable amenities such as backyards, communal pools, and gyms, all within easy reach of downtown Austin.

Benefits and Drawbacks of Renting

Tenants enjoy the convenience of renting, including less maintenance responsibility. However, some miss out on building equity. Additionally, many renters prioritize the flexibility and amenities offered by upscale communities. Developers argue that build-to-rent communities address the housing shortage. Moreover, these developments provide access to desirable neighborhoods that might otherwise be unaffordable.

Concerns Over Build-to-Rent’s Impact

Some economists and housing officials are concerned that build-to-rent developments may divert attention from the need for homes. Ermengarde Jabir, Director of Economic Research at Moody’s, warns that new housing supply is shifting toward rental communities. This shift could keep home prices high by reducing supply in the for-sale market. Additionally, regulators are closely monitoring institutional investors’ growing influence in the rental market.

Monitoring Potential Issues with Large Landlords

Government regulators are vigilant about the rise of large institutional investors in the single-family rental market. In September, Invitation Homes, the largest operator, paid $48 million to settle charges with the FTC. These charges were related to deceptive rental pricing and unfair evictions. Ruth Jones Nichols, a former housing official, expressed concerns about the increase in evictions under large landlord ownership.

AvalonBay’s Defense of the Build-to-Rent Model

Despite the concerns, AvalonBay’s Birenbaum maintains that the firm’s build-to-rent developments do not affect the for-sale market. He emphasized that AvalonBay does not acquire homes that individual buyers would typically purchase. “We’re not competing with individuals seeking to buy homes,” Birenbaum explained, defending the company’s role in expanding the rental market.

Wall Street firms are shaping housing trends, offering renters like Harlow more affordable options amidst high prices and mortgage rates, according to wsj subscription.