Expert warns against building too much rental housing in Phoenix
- Developers are spending heavily to build all-rental single-family home communities.
- Build-for-rent developments have exploded in popularity among investors over the past two years.
- But one housing expert warns of the risk of overbuilding, especially in hot markets like Phoenix.
Deep-pocketed investors haven’t been able to get their hands on enough homes during the pandemic, despite spending billions of dollars on single-family rental properties across the United States last year.
Thus, a growing number are pursuing a strategy known as build-for-rent. They are developing entire communities that look like typical suburban neighborhoods, except the homes will likely never be sold to individual buyers. Instead, they are rented out to tenants who, by choice or necessity, are looking to rent a single-family home rather than buy.
BFR developments have become “the hottest residential real estate investment”, according to housing expert John Burns, founder and CEO of John Burns Real Estate Consulting. His company’s database now tracks about 650 build-to-let communities across the country, 27% of which were built in the past two years.
But developing BFR communities is much easier said than done, Burns warned during a recent webinar sponsored by real estate firm Berkadia. And though Burns has said he’s “all in” on building for rent over the next 20 or 30 years, he sees some issues.
“There’s a lot of supply on the way. A lot,” Burns said. “It won’t appear in the spring. It’s under construction and it’s taking forever to build.”
One area that Burns pointed to as a market that could be overbuilt is Phoenix, which is widely seen as the original hotspot for build-to-let developments.
Today, the Phoenix metro area is home to 52 BFR communities, Burns said, more than double that of Houston, which has the second-most communities, at 24. As developers vie for land, they are building in places that may not have the demand to support as many new rental units, Burns said.
“We see a lot of proposals in Buckeye and Casa Grande,” Burns said, naming two towns on the outskirts of Phoenix. “Casa Grande is a truck stop on the way to Tucson – I’m sorry if you’re investing there – and it could probably handle one, but not 10. There are risks involved.”
After a banner year for single-family rentals in 2021, Burns said build-to-let developers should be “more selective and strategic” this year.
“We’re still very optimistic overall, but it’s not all going to work out,” Burns said.
Several factors contribute to this. In most areas, home prices have risen more than rents, depressing returns for investors, Burns said. All kinds of investors are also competing for single-family rentals, making it harder to scale home portfolios.
There is also the question of the supply which is on the way. There are about 900,000 U.S. homes under construction or licensed, according to data from John Burns, which is high but still below 2006 levels. Meanwhile, 833,000 multi-family units are also on the way, a 50-year high. years, according to the data.
Combined, that’s 1.7 million units, which Burns says is more than a year’s worth of build supply today.
“The fictitious supply of new homes under construction is the highest in 45 years,” Burns said.
For investors looking to put their capital to work in build-to-let projects, Burns cautioned that finding good locations isn’t easy.
“We have clients trying to put a billion dollars to work this year,” Burns said. “You can’t find a billion dollars of good locations. You have to take some location risk.”