The build-to-rent (BTR) sector has been one of the most dynamic areas of growth in U.S. housing over the past few years. Characterized by clusters of leased single-family homes, this property type provides an alternative for people who want the experience of a traditional home without the long-term commitment of ownership. The appeal of build-to-rent homes is multifaceted: they offer more space and privacy than apartments, attract families and individuals priced out of homeownership, and cater to those seeking flexibility in their living arrangements.
But despite the sector’s rapid expansion, a confluence of challenges is likely to slow the pace of new build-to-rent developments in the coming years. In this article, we’ll explore the rise of build-to-rent, the factors contributing to its growth, and the emerging obstacles that developers and investors must navigate in this evolving market.
The Rapid Growth of Build-to-Rent
In recent years, the build-to-rent sector has enjoyed a period of explosive growth. From 2019 to 2023, project completions increased by 270%, according to the National Rental Home Council. The sector’s appeal is underscored by the increasing demand for rental housing, particularly among those who want more space than a typical apartment offers but are unable or unwilling to buy a home. As of 2023, nearly 25,000 build-to-rent homes were completed, marking a 62% increase from the previous year.
Developers have responded to this demand with larger and more ambitious projects. Firms like American Homes 4 Rent and Invitation Homes, two of the largest build-to-rent developers in the U.S., have consistently expanded their portfolios, with Invitation Homes promising to invest $1 billion in build-to-rent projects this year. These developments generally feature clusters of single-family homes that offer residents the benefits of suburban living — such as yards, garages, and more square footage — with the flexibility of a rental agreement.
Demand Drivers: Affordability and Flexibility
The success of the build-to-rent model stems from a unique convergence of market forces. As home prices continue to rise across the country, especially in popular markets like Wake Forest, North Carolina, potential homebuyers are increasingly priced out. The Federal Reserve reports that home prices in Wake County, where Wake Forest is located, have risen nearly 33% since the pandemic began. This sharp increase in home prices has left many families and individuals in a bind: they want the benefits of a single-family home, but they can’t afford to buy one.
For these renters, build-to-rent homes offer a compelling alternative. Families that need more space than a traditional apartment can offer — whether for children, remote work, or simply for lifestyle reasons — are attracted to the larger homes available in build-to-rent developments. These homes often feature finishes and amenities that are comparable to those found in Class A apartment buildings but with the added benefit of more privacy and outdoor space.
Build-to-rent homes also cater to people who value flexibility. Many potential homeowners hesitate to buy because they’re unsure about their long-term plans. Whether they’re waiting for more job stability, trying to save for a down payment, or simply uncertain about their future location, renting a single-family home gives them the chance to live in a house without making a long-term financial commitment.
The Coming Slowdown in Development
Despite the strong demand for build-to-rent homes, the sector is facing headwinds that threaten to slow the pace of new development. A CoStar analysis of build-to-rent completions indicates that while 2024 is expected to see the arrival of as many as 34,000 new units, completions could drop dramatically in 2025. The number of build-to-rent completions could fall by as much as 73%, bringing the total number of new units down to just 9,500.
The reason for this slowdown is not a lack of demand, but rather a series of capital constraints that are making it difficult for developers to secure financing. According to Brad Hunter, founder of Hunter Housing Economics, the slowdown began to take shape over the past year as interest rates rose. "As long ago as about nine to 12 months, about half of my clients were saying they couldn't find debt, and the other half were saying they couldn't find equity," Hunter said. "The banks exited that sector altogether as soon as interest rates went higher."
Rising interest rates have created a challenging environment for developers, not just in the build-to-rent sector but across the real estate landscape. With borrowing costs higher and lenders more cautious, securing financing for new projects has become more difficult. This is particularly problematic for the build-to-rent sector, which remains relatively small compared to the broader multifamily market.
Strategic Adjustments from Developers
While some developers are slowing down, others are adjusting their strategies to take advantage of the changing market dynamics. One notable example is Middleburg Communities, a developer of both apartments and single-family homes for rent. The Vienna, Virginia-based company has been increasing its investment in build-to-rent properties, even as other developers scale back.
Middleburg recently broke ground on a 260-unit build-to-rent development called The Hamlet at Quail Crossing in Wake Forest, North Carolina. The project includes plans for more than 230 detached houses and 26 duplex units, catering to a market where median home prices have surged beyond $550,000. Middleburg believes that by delivering high-quality rental homes in a market with limited supply, they can command a premium over traditional multifamily developments.
This strategy has paid off so far. Middleburg’s build-to-rent portfolio has grown to $700 million over the past three years, and the company’s build-to-rent units have generated a 15% to 20% rent premium over similarly sized conventional multifamily units. The lack of new construction in the build-to-rent sector means that projects that are completed in the next few years are likely to benefit from reduced competition, which could further drive rent growth.
Build-to-Rent’s Advantage Over Traditional Multifamily
One of the key advantages of the build-to-rent model is its ability to generate higher rent growth compared to traditional multifamily properties. According to CoStar data, traditional multifamily supply has expanded by 2.4 million units in the past five years, while just 124,000 build-to-rent units have been completed nationally. Despite its relatively small footprint, build-to-rent is already generating above-average rent growth for its major players.
In the second quarter of 2024, American Homes 4 Rent and Invitation Homes recorded an average annual rent growth rate of 5%, compared to just 0.1% for traditional multifamily developers like Mid-America Apartment Communities and Camden Property Trust. In fact, new lease rents for traditional multifamily units were down 4.2% during that time, highlighting the growing disparity between the two property types.
This disparity is driven by the unique appeal of build-to-rent homes. While traditional apartments offer convenience and location, they can’t match the space, privacy, and amenities that build-to-rent homes provide. As long as demand for single-family homes remains strong, build-to-rent is likely to continue outperforming traditional multifamily in terms of rent growth.
Conclusion
Looking ahead, the build-to-rent sector faces both opportunities and challenges. The rising cost of capital is likely to constrain new development in the short term, but the strong demand for single-family rentals suggests that the projects that do get completed will be well-positioned for success. As Middleburg Communities’ T.J. Sedeski noted, “The rental market is more favorable just because deliveries will be much less and there will be less competition.”
For investors and developers, the build-to-rent sector remains a promising area of growth, but navigating the current environment will require a strategic approach. Those who can secure financing and deliver high-quality rental homes in undersupplied markets will likely continue to see strong returns, even as the broader real estate market faces headwinds.
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