SFR Insider ? Feb 2023 ? Build-to-Rent Insights + more

With over $5B in single-family rentals (SFRs) acquired, operated, and sold, Roofstock is a leading platform enabling institutional investors, real estate investment trusts (REITs), builders, and global asset managers to buy, manage, and sell SFR properties and build-to-rent (BTR) communities at scale.

Our institutional team represents buyers and sellers on the largest SFR portfolios in the market and has closed transactions totaling over 7,000 homes in the past 24 months. We prize ongoing collaboration with SFR owners and operators across the industry. We’re always available to discuss current market dynamics and offer our insights, irrespective of your current brokerage needs.

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Build-to-Rent Insights from Roofstock’s Institutional Services Team

Given the dramatic shift in the market over the last 12 months, build-to-rent inventory has become an increasingly attractive entry point for SFR investors. This shift underlines an ongoing flight to safety and certainty: 1) these properties don’t have tenants in place so enduring below-market rents until leases roll is a nonfactor, 2) there’s no deferred maintenance since it’s all brand-new construction, and 3) the underwriting is typically more straightforward with fewer moving pieces to get in the way of a successful contract negotiation.?

Heading into 2023, we’ve gleaned key information from some of the largest builders, developers, and owners in the BTR space.

Buyers are getting hyper-specific on their acquisition strategy?

During the Urban Land Institute Fall Meeting at the end of 2022, many conversations centered around builder tapes, with 30-40k BTR homes circulated to most of the major institutional investors. The big takeaway (based on a conversation with a top 20 SFR owner) was that after adding a few filters, 95% of the inventory didn’t match their buy box. This excess inventory, which was originally intended for retail buyers, has three main problems for institutional investors: price, size, and location.?

Price and size: When the math doesn’t match

Buyers are particularly uninterested in large, higher-priced build-to-rent inventory. In markets like Phoenix and Las Vegas, a $500k home with $2k in-place rent is simply not going to pencil out for today’s institutional investor. This situation could work well for an owner occupant, but even if a large-scale seller is offering a 15% discount on the retail price, the resulting cap rate won’t be anywhere close to one needed to produce positive cash flow. In the past, investors were willing to buy $500k homes at $425k and absorb a lower-yielding home due to the large amount of embedded equity. Today, we are seeing more of a shifting desire toward cash flow, and buyers are reluctant to go to tertiary markets just to hit their desired yield.

Location

Buyers are rethinking new markets heading into 2023 versus 9-12 months ago, when secondary and tertiary MSAs were the top targets for many investors’ expansion strategies. We’re seeing a significant pull back as buy boxes tighten around population density and core markets. Employment is a growing concern for many institutions––many of which view these communities on the outskirts to be more susceptible to a possible economic downturn. Many buyers are increasingly reluctant to take a seller's market rent assessment at face value. If they can’t accurately forecast rent, institutions run a very real risk of getting burned in the first year of operations.?

Are you currently analyzing a build-to-rent portfolio??Roofstock’s proprietary portfolio diagnostic can help you make an informed investment decision. Reach out to our team at?[email protected].

BTR operators are weighing the benefits of contiguous versus scattered-site communities

Depending on individual strategies and acquisition goals for 2023, we’ve gotten a fair amount of feedback that scattered-site, new-build portfolios are performing better from a lease-up perspective while contiguous communities are garnering better results from a general operating perspective.?On average, scattered-site portfolios that have a larger geographic footprint tend to have better absorption rates per month––allowing for a shorter timeline to full stabilization. These properties can allow for more product diversity to appeal to a larger rental base.?

Though contiguous communities are more constrained by the lease-up of other homes in that community, there are operational benefits for economies of scale.?One of the perks of a contiguous community versus scattered site is the ability to be more efficient with your property management and repair and maintenance budget. Since all of your properties are close together, operators might budget half the personnel of a scattered-site portfolio.?

Given all of this, operators are careful with how they’re structuring incentives. They realize that if they drop rent $50 on one property, that will have potential downstream effects for the rest of their inventory as it delivers––especially in a contiguous community. Instead, they’re opting to give one month’s rent off for a 12-month lease and keep the top-line rent the same, to protect yields throughout the community. Similarly, scattered-site, new-build communities can standardize major systems and typical repair items within each home to increase operational efficiency.?

Interested in learning more about BTR operating best practices??Reach out to our team at?[email protected].

Roofstock's Build-to-Rent Portfolio Infrastructure

As build-to-rent becomes a bigger focus for our clients, Roofstock’s team is working to build features that address the rapidly evolving needs of the sector. Our team recently released an updated version of our portfolios-for-sale marketplace–specifically catering to BTR inventory.

Some key features include:?

• High-level BTR metrics?
• Floor plan information??
• Market and community highlights?
• Photo carousel
• Documents center

Click here to check out an example portfolio.

Roofstock Sponsoring IMN BTR East Conference in Nashville?

Our team is headed to the IMN BTR East Conference in Nashville March 2–3. Be sure to catch Matthew Heintz, Roofstock’s Team Lead | Build to Rent, on the panel “Valuation of BTR Product Today” March 3rd at 11:30 am.

If you’re interested in learning more about Roofstock’s BTR capabilities, stop by our booth or set up time to connect with our team by emailing us at [email protected].

No Agency/Fiduciary Relationship: This newsletter, the information on the marketplace, and the information received from Roofstock employees is intended for informational and educational purposes only. It is not real estate, investment, or financial planning advice. Roofstock is not your advisor or agent unless expressly specified by Roofstock Realty, LLC. Please consult your own experts for advice in these areas.