The Future of Build to Rent Conference in Dallas
Many thanks to Tim Sullivan and the Zonda team for a great conference on The Future of Build to Rent in Dallas.
The good news:
We agree that the industry is in the first inning of the Build to Rent market as a growing, sustainable asset class (@ Sudha Reddy)
Regional banks are still lending, although the bar on quality of borrower and financing terms has been raised substantially, increasing the barrier for new entrants
New BTR homes still garner a significant rent premium over comparable multi-family units
Product, location, and amenities inside and out are all key factors in attracting desired tenants and capital
The bid/ask spread on forward-sale (acquire at CO) BTR home sales is narrowing, and sellers with solid embedded margins are finding attractive/executable bids
The less good news:
There is still significant equity capital ready to deploy into the sector, though it is definitely challenging to pencil and close deals today
Hesitancy persists as the availability and cost of debt are headwinds through the entire project lifecycle, from land acquisition & construction through permanent financing
’Yields are an illusion’. Yield to Cost (YTC or NOI/total cost basis) on a new project needs to be close to 6-7%, with realistic and timely assumptions on insurance costs, taxes, and untrended (i.e. flat) rents
Landowners fared well over the last few years, and there is no catalyst for them to discount today, sustaining a wide bid/ask spread. Traditional homebuilders may be the first movers to purchase new lot deals if new home sales continue to improve
What To Do:
Ride out the waves by staying disciplined. Seasoned BTR operators are staying disciplined and looking to close 2-4 new deals this year vs. 8-10 in prior years. Focus on execution of existing deals, sticking to strategy, and being ready when market conditions improve (i.e. rates come in, financing terms improve, costs come down, rent outlook improves)
Focus on motivating your team and reinforcing your culture. Team tenure and culture matter, especially as many SFR and BTR operators are facing their first housing cycle, this builds trust internally and is well received by investment partners
Optimize your product. Take a second look at floor plans, technology, and operating budgets. Where can you be more efficient, where can you streamline costs, where can you generate additional fees
Whelan Advisory has raised over $7 billion in capital for operators in the Single-Family Rental sector over the past 4 years. Let us know if you’d like to have a confidential conversation about your company’s strategy and capital needs.