In recent years, institutional investors (defined as those owning more than 10 properties), started buying newly built homes following a long hiatus after the foreclosure flood ended five years ago. Instead of buying bargain basement homes, many of these real estate investment trusts and private equity funds are buying properties purpose-built as rentals.

The number of single-family homes built to rent increased over the past four quarters from 33,000 to 37,000 homes. Last year saw the largest number of built-to-rent houses completed in 14 years. In the first quarter of this year, built-to-rent homes accounted for 4.3 percent of all single-family starts. The new homes helped to raise the institutional investor market share to 37 percent of all single-family rentals, a new high, according to Attom Data Solutions.

The allure of new homes

Though built-to-rent homes make up a tiny percentage of new home construction, some observers believe this is just the beginning of a trend.

“We believe that number (of new homes built for rent) will increase significantly over the next several years. We expect detached homes for rent to become an important segmentation opportunity for the top masterplans in the country, who will no longer ignore 10 percent of housing demand,” real estate consultant John Burns said.

Why would a business built on a model based on buying and rehabbing low-cost foreclosures switch to new homes?

After a long hiatus, institutional investors are seeking to increase their stake in rentals to take advantage of demand, and bargain-priced properties are rare. New homes require less maintenance than existing homes; they can command rents that are 5 percent to 8 percent higher; and they’re more likely to attract top quality tenants.

Institutional investors partner with developers

Institutional investors began their relationships with builders by buying their unsold inventory at a discount: “They’ll offer to take down 10 percent to 15 percent of the community right away, maybe at the end of the community or in an area where the builder already has some spec inventory built. The investor can take down 50 homes in one fell swoop, and the builder can move on,” Rick Palacios, director of research at John Burns Consulting, said.

Soon, institutional investors found they could lower their acquisition costs even more by partnering with developers to provide upfront financing.

Now they are becoming developers themselves. Two of the largest institutional investors, Invitation Homes, which merged with Starwood Waypoint last year, and American Homes 4 Rent, are developing their own projects from North Carolina to California.

In turn, some homebuilders have become landlords, building and managing their own rentals.

In March, Lennar opened an 80-home development near Sparks, Nevada; JMC Homes is building about five dozen rentals in Sacramento; AHV Communities in Newport Beach is involved in the construction of 1,000 rental houses in Austin and San Antonio; Camillo Properties in Sugar Land, Texas, has built more than 3,000 houses around Houston, San Antonio, Dallas and Fort Worth.

It’s the better alternative for many

The build-to-rent boom has just begun. According to CoreLogic, single-family rents climbed steadily between 2010 and 2018, but rent growth slowed to 2.8 percent in February. Vacancy rates are falling to cyclical lows as millennial households priced out of ownership are finding single-family rentals to be a welcome alternative.

For thousands of young families, single-family rentals have become a stepping stone to homeownership, an attractive alternative to apartment living while the family saves for a down payment and waits for affordability to improve.

As time passes and the inventory drought continues to inflate prices and reduce supplies of affordable starter homes, more and more millennial and Gen Z families will remain single-family renters for years to come.

Steve Cook is a communications consultant and editor of Real Estate Economy Watch.

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