The Market for Single-Family Rentals Grows as Homeownership Wanes

The lawns are manicured. The swimming pools sparkle in the sun. And the homes, all of them turnkey and smelling of fresh paint, are lined up in tidy rows, an army of cookie-cutter porches standing at attention.

Covid-19 inflamed the real estate market, pushed Americans toward the suburbs and changed our relationship with where we live, work and play. It also accelerated interest in built-to-rent housing, which even before the pandemic was expanding at a breakneck pace.

The number of built-to-rent homes — single-family homes constructed expressly for the purpose of renting — increased 30 percent from 2019 to 2020. Today, they make up about 6 percent of all new homes being built in the United States, and that number is poised to double in the next 10 years. This is the fastest-growing sector of the American housing market, and it is increasingly master-planned and built on tracts. On the fringes of America’s second-tier cities, entire villages owned by large-scale investors are popping up, offering renters who either can’t or don’t want to spring for a down payment another path to the American dream.

Many built-to-rent housing projects look like any other planned suburban communities, albeit with smaller backyards and homes squeezed a bit closer together. Houses often have luxury finishes like granite or quartz countertops and stainless steel appliances. And for tenants, the traditional hassles of homeownership are avoided: Common areas are maintained by gardeners and maintenance staff, a service for which renters often pay an additional monthly fee of around $100. If a toilet breaks or the roof leaks, management takes care of it.

“Years prior to the pandemic, we found that consumers were drawn to a housing option that combines the best of both worlds: single-family living and no-hassle, maintenance-free leased living,” said Josh E. Hartmann, the chief executive of NexMetro Communities, a developer with two dozen neighborhoods of built-to-rent homes, the majority in the American Sun Belt.

The quality of these built-to-rent homes holds up to that of traditional homes. And for consumers hesitant to put down long-term roots, they may be a better financial bet. “If you don’t think you’re going to be someplace for three years or more, the transaction costs are just too high to buy,” said Norman Miller, a professor of real estate finance at the University of San Diego. “The only downside is you’re going to lose out on the investment aspects of homeownership.”

Two months ago, Brian and Amanda Voorhees moved with their two children to 360 Communities at Shearwater, a community of 127 two-, three- and four-bedroom townhouses and single-family homes about 40 minutes from Jacksonville, Fla. They left New Jersey after selling their 3,600-square-foot home there at the top of the market, and they weren’t ready to jump into a new investment.

“We really wanted to have the flexibility to enjoy life versus having to worry about repairing the roof or cutting the grass rather than heading to the beach,” said Mr. Voorhees, a vice president of underwriting for an insurance broker. “We didn’t want to have to worry about all the potential pitfalls of homeownership.”

They rent their new home, a four-bedroom townhouse, for $2,600 a month. Mr. Voorhees, 33, now works from home, and Ms. Voorhees, 36, stays at home with Braden, 7, and Abigail, 4, taking the children for bike rides along the community’s trails and spending hours with them at the community pool.

Shearwater is an affiliate of Freehold Communities, a developer of master-planned projects in seven states across the Sun Belt. Most include parks, trails and greenbelts; Shearwater has a lazy river, tennis courts and a lagoon.

The Voorheeses, who invested the profit they made from the sale of their home in New Jersey in stocks, an I.R.A. and college funds for their children, said they may choose to buy a home in the future, but are in no hurry.

“When we tell people our plan is to long-term rent, they’re a little bit taken aback. There is still a stigma attached to renting,” Ms. Voorhees said. “But when you break it down and look at the lifestyle that being in the rental affords us, it makes a lot more sense.”

Tom and Mariko Farrelly live nearby, in the same community. Mr. Farrelly, 65, works for a small brokerage; Ms. Farrelly, 61, is a retired teacher. Mr. Farrelly’s job was transferred from Westchester County, N.Y., to Jacksonville in December 2020, and the couple, who hope to retire in Ms. Farrelly’s home country of Japan in a few years, weren’t interested in buying a home for a short period, especially in such a wild housing market.

They pay $2,300 a month for a two-bedroom townhouse, and an additional $160 in monthly fees to cover gardening, trash removal and access to amenities like fitness classes. Ms. Farrelly enjoys aqua aerobics classes and Zumba at the fitness center. “Apartment living is cheaper,” Mr. Farrelly said. “But when you’re in an apartment, you know you’re only going to be there for a year. Here, people have upkeep on the homes like it’s theirs.”

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The Voorhees and Farrelly families represent a growing contingent of Americans who make relatively high salaries but are opting not to buy. In 2019, a Wall Street Journal analysis of Census Bureau data reported that the number of households with six-figure incomes who were renting had reached 19 percent, up from 12 percent in 2006.

But that sector in the rental market is eclipsed by another: adults under 35 who, according to the Census Bureau, have the nation’s lowest rate of homeownership, at 37.8 percent. Rampant credit card and student loan debt, coupled with an inflated housing market and stagnant earning potential, now means that Americans in Generation X, who are between 40 and 55, have four times the assets of America’s youngest adults. Simultaneously, the national homeownership rate continues to plummet.

Into this melee, the emergence of long-term remote work has offered younger Americans an exit route out of the nation’s most expensive urban centers. As they begin to marry and think about having children, the built-to-rent revolution is reviving the possibility of a suburban lifestyle that many felt was out of reach.

“The majority of opportunities in this country have traditionally been rooted in the Old World American dream, with a white picket fence, two and a half kids and a dog. But that is fundamentally changing,” said Paraag Sarva, chief executive of Rhino, a start-up that sells insurance renters can buy in lieu of putting down a security deposit.

“Millennials and Generation Z get painted as having preferences for things like avocado toast and $6 coffees at Starbucks,” Mr. Sarva said. “But 40 percent of Americans can’t afford a $400 emergency, let alone relocating to a new home. It’s not really about consumer preferences for expensive avocados.”

The built-to-rent movement took off in 2010, when investors like Colony Capital, Starwood Capital and Blackstone saw an opportunity in the spoils of the financial crisis and began snapping up foreclosed single-family properties. Investors next turned to developers building large-scale housing projects, offering to buy the last 10 or 15 percent of an owner-occupied project and lease the units at a profit.

“That was the on-ramp for institutions to come in and say, ‘Hey, developer, I’ll close out the project for you, and then I’ll rent these homes,’” said Gary Beasley, the chief executive of Roofstock, an online marketplace for investment in and management of single-family homes. “People saw these rental homes could coexist just fine with owner-occupied homes.”

By the time the pandemic hit, institutional landlords had shifted focus to full-on subdivisions of rental properties. In May, Redfin reported that investors had spent $77 billion on homes over the past six months. That same month, Invitation Homes, the largest single-family leasing company in the United States, announced a joint venture with the investment firm Rockpoint that involved a $1 billion shopping spree on single-family homes across the country, which will be renovated and leased.

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As the housing crunch grows tighter, the cash continues to pour in — and some in the real estate industry predict that the trend will have damning consequences.

“The single-family home market has become an inevitable asset class for institutional money,” said Aaron Graf, the chief executive of the New York City real estate brokerage LG Fairmont. “A normal buyer can’t compete with an all-cash offer from an institution, especially if it comes in high. Young people are thus being priced out of the starter single-family home.”

It’s a vicious circle, Mr. Graf said, in which a shortage of homes perpetuates a shift toward renting, which will exacerbate the housing crisis.

“There is a narrative being pushed on young people that it is better to rent than to own,” he said. “This trend will be devastating for young people’s ability to build wealth, as housing is the No. 1 wealth builder.”

The supply of owner-occupied housing in the United States has grown by 10 percent over the past five years, while rental housing has increased just 1 percent. Freddie Mac estimates the housing undersupply in the United States to be more than 275,000 homes.

“There is as much a shortage of homes in the rental market as there is in the home purchase market,” said David Howard, the executive director of the National Rental Home Council. “Demand for single-family rental housing has been on the rise, partly in response to the Covid pandemic, but also because of strong underlying demographic factors.”

The shift appeals to landlords, as well, as renters in single-family homes tend to stay longer and have lower delinquency rates. NexMetro Communities, whose 23 neighborhoods carry the shingle Avilla Homes, has seen renter retention rates increase 20 percent since early 2020. For investors and landlords, built-to-rent properties increasingly offer a higher return, one that continues to pay dividends year over year. “With so many landlords stuck with nonperforming tenants, built-to-rent offers a higher capitalization rate than property development and sales,” said Justin Abdilla, a real estate lawyer. “Why slaughter the sheep when you can shear it?”

Nicolette Boxe, an investor and real estate agent in Leesburg, Va., agrees. After years of buying and renting properties one by one, she is now building a community of two-story, three-bedroom townhouses in her hometown, DeRidder, La. The homes, which each come with an electric car port and a small backyard, will rent for around $2,000 a month. They’ll stand out in DeRidder, she said, and that’s the point.

“We’re trying to give people an urban-city feel, even in Louisiana, where people aren’t accustomed to it,” she said.

In NexMetro’s communities, surrounding Phoenix, Dallas, Denver and Tampa, “residents are primarily renters by choice,” said Mr. Hartmann, the chief executive. “They have the wherewithal to buy, but are choosing to rent because of their life stage and preference. For them, it’s a lifestyle play.”

Micaela Cullender, 22, a fraud specialist for Goldman Sachs, chose the Avilla Heritage community in Grand Prairie, Texas, near Dallas, after noise from neighbors in her apartment building became intolerable while she was working from home. She and her fiancé, Tate Stavenhagen, were going to buy a home after getting married. After living at Avilla, where they have 10-foot ceilings and quartz countertops, they are planning to build a home with amenities on par with those of their rental.

“It’s brand-new here, and when we were house hunting we had higher expectations because everything at Avilla is so up-to-date,” Ms. Cullender said. “We realized we’d be downgrading the interior of our house if we bought, so we’re building.”

Matt Abdulla, 51, and his wife, Rhonda, came to Avilla Buffalo Run, near Denver, to be closer to their 10 grandchildren. Two factors sealed the deal: the privacy afforded by no shared walls, and the warm welcome offered to their two German shepherds.

The couple’s two-bedroom cottage rents for $1,600 a month. It’s smaller than their previous rental home, and Mr. Abdulla dislikes being charged $8 a month to park his car, but having a small backyard and privacy, he said, makes it worthwhile.

“You’re not attached to anyone below you, above you or on side of you,” he said. “Rent’s a little bit expensive, but it’s cozy and feels like home.”

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