In the evolving landscape of real estate, single-family home rentals have emerged as a popular asset class, particularly in larger cities. However, this trend does not seem to translate well in secondary markets, where the financial dynamics differ significantly. Trilogy Investment Co., based in Alpharetta, Georgia, recently exemplified this shift by pulling back from its build-to-rent projects in smaller markets like Tallahassee, Florida, Winston-Salem, North Carolina, and Winder, Georgia. Instead, Trilogy sold these sites to builders focused on for-sale homes, such as Miami-based Lennar.
Financial Viability and Rent Growth
The decision to abandon the build-to-rent concept in these secondary markets stems from a critical issue: rent growth is softening as supply increases. Jason Joseph, CEO of Trilogy, explained that the financial model for build-to-rent properties doesn't work in areas where rent growth is moderate. "People can only afford so much rent, but as buyers, they can afford slightly more expensive houses," Joseph noted. This discrepancy makes renting less attractive compared to buying in these regions, where financial constraints are more pronounced.
Cost and Market Dynamics
Renting a single-family home typically costs more than renting an apartment, providing tenants with more space and a sense of stability without the long-term commitment of ownership. However, in secondary markets, consumers often find this added expense unjustifiable. According to Sean Salter, a real estate researcher and finance professor at Middle Tennessee State University, "They have to charge a certain amount in rent, but the market is not supporting that." Builders in these markets face the challenge of balancing construction costs with what the local market can bear in terms of rent. When the numbers don’t add up, selling to traditional homebuilders becomes a rational strategy to hedge against financial risks.
Secondary Markets and Consumer Affordability
Smaller markets tend to lack the affluent consumers who can afford higher rents. For instance, the rental market in Tallahassee has softened considerably, with new supply outpacing renter demand for the third consecutive year. This has kept vacancy rates high and exerted downward pressure on rents. Similarly, Barrow County in Georgia, home to Winder, has a vacancy rate of 35.9%, making it difficult to justify high rental prices. In Winston-Salem, the average rent of $1,190 per month is significantly lower than what it would cost to rent a newly built house, further highlighting the financial impracticality.
Strategic Shifts by Major Players
Despite these challenges in secondary markets, single-family rentals remain viable in larger cities. Companies like Invitation Homes and AMH have reported revenue growth by focusing on major markets. Invitation Homes, the largest single-family rental landlord in the U.S., targets expansive markets such as Denver, the Carolinas, South Florida, Chicago, and Dallas. These areas offer a larger pool of renters who can afford the premium associated with single-family homes, and the companies can manage thousands of properties efficiently.
The Future of Build-to-Rent in Secondary Markets
The experience of Trilogy Investment Co. underscores the importance of market-specific strategies in the real estate sector. While single-family home rentals thrive in larger, more affluent markets, they struggle in secondary markets where rent growth and consumer affordability are limited. This regional variability necessitates a nuanced approach, with investors and builders adapting their strategies based on local economic conditions.
As the market for single-family rentals continues to evolve, understanding these dynamics will be crucial for investors. By recognizing the limitations and opportunities within different markets, stakeholders can make informed decisions that balance financial viability with consumer demand, ensuring the long-term sustainability of their investments.
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