By James Rodriguez – Reporter, Denver Business Journal
Aug 13, 2021
Billions of dollars are flowing into single-family rental homes, an asset class that rose to prominence in the aftermath of the Great Recession and is now at the center of another boom.

Some companies are laying plans to acquire tens of thousands of existing single-family homes in the coming years. But, unlike a decade ago, a growing number are also investing heavily in a newer strategy: building entire subdivisions of homes that they plan to rent out rather than sell to individual buyers.

There are an estimated 114,800 single-family rental homes in the Denver metro, about 9% of the total housing stock, according to data from John Burns Real Estate Consulting.

That figure is almost certain to rise in the coming years, as new “build-for-rent” communities, comprised of homes built specifically to serve as rentals, are expected to pop up across the Denver metro.

Devyn Bachman, vice president of research for John Burns Real Estate Consulting, calls build-for-rent “the hottest topic to hit the real estate market in a few years.”

“We are seeing a lot of build-for-rent development being hypothesized in the Denver market now,” Bachman said. “There’s a number of projects out there existing today — not a ton, but a number of them. But I can definitely tell you there’s more coming in the pipeline.”

The majority of single-family rental owners are small operators that own fewer than 10 properties. Large, institutional investors began entering the space following the Great Recession, buying up homes out of foreclosure and converting them to rentals.

Today, well-funded investors are devoting significant resources to single-family rentals, which in recent years have offered higher levels of rent growth than traditional apartment products. Low interest rates, a booming housing market and demand from renters seeking more space during the pandemic have also drawn attention to single-family rentals as desirable investments.

Real estate investors (both institutional players and small-scale owners) purchased a record $48.5 billion worth of homes across the U.S. in the second quarter of 2021, according to a report from Redfin.

But in a metro like Denver, where home prices have risen dramatically and inventory has reached historically low levels, it’s become harder for investors to scoop up homes in large quantities. Denver was absent from Redfin’s list of the top 20 U.S. metros with the greatest shares of homes bought by investors in the second quarter.

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“At some point, there’s just not enough supply in the housing market to really grow as aggressively as a lot of these operators and developers would like to,” Bachman said.

That’s where build-for-rent developments come in. The communities are more efficient to manage than portfolios of scattered homes, and allow investors to scale their holdings more quickly. They also tap into a segment of renters who want to live in single-family homes but have either been priced out of the for-sale market or don’t want the responsibilities and commitment of ownership.

Freshly poured concrete pads await framing at The Front Porch by Oakwood Homes.
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Freshly poured concrete pads await framing at The Front Porch by Oakwood Homes.
SETH MCCONNELL | DENVER BUSINESS JOURNAL

Since 2015, a total of 418 new build-for-rent homes have been completed within Denver-area communities that have 50 units or greater, and an additional 337 are under construction today, according to commercial real estate data firm Yardi Matrix.

Yardi Matrix counts at least 10 build-for-rent communities, comprised of roughly 1,500 homes, that have either been completed or are under construction in the Denver metro.

“What you see is these usually would occur on the exurbs, or the borders between urban cores and these suburbs or rural areas, because the land meets the cost targets, and you can provide the development faster and more affordable to a millennial population,” said Doug Ressler, manager of business intelligence for Yardi Matrix.

Between projects that are either being planned or under construction, Ressler estimates that there are well over 1,000 build-for-rent units currently in the pipeline in the Denver metro.

Another real estate consulting firm, Hunter Housing Economics, pegs the Denver-Colorado Springs region as one of the top targets for build-for-rent development, predicting the number of units to grow to 1,836 by the end of this year.

Wheaton, Illinois-based Watermark Equity Group, which builds rental communities under the Canvas Communities brand, is one of several build-for-rent developers to enter the Denver market in the past several years.

The company is currently partnering with Argosy Real Estate Partners to build Canvas at Castle Rock, a single-family, build-for-rent community comprised of 102 townhomes.

“We couldn’t be more bullish about the future,” said Chris Crooks, director of investments for Watermark. “When you think about rental housing, and housing in general, there really hasn’t been a whole lot of innovation for the last 20 years.”

A ‘flood of capital’
A sampling of recent announcements from large investors highlights the renewed interest in the single-family rental sector over the past year.

Toronto-based Tricon Residential, one of the largest players in the single-family rental space, recently formed a $5 billion joint venture with several institutional investors to acquire more than 18,000 single-family rentals across the country over the next three years, the company announced in July.

In June, Blackstone Real Estate Income Trust said it has agreed to acquire Home Partners of America Inc., which owns more than 17,000 homes around the country, in a $6 billion deal.

The chief financial officer of American Homes 4 Rent, another publicly traded owner of single-family rentals, said in an earnings call in February that the company expects to invest between $1.2 billion and $1.6 billion this year, adding roughly 3,500 homes to its portfolios, including 1,900 to 2,200 homes through its build-for-rent arm, AMH Development.

Denver-based Atlas Real Estate, known primarily for providing brokerage and property management services to institutional investors in the single-family rental sector, is also getting in on the action.

This past spring, the company entered into a joint venture with San Francisco-based DivcoWest to invest $250 million of equity in single-family homes throughout the western U.S. The companies expect to deploy $1 billion acquiring and renovating homes in “high-growth states” such as Colorado, Arizona, Idaho, Nevada and Utah, according to a release from Atlas.

Atlas’ founders began fixing and flipping homes in 2008, and continue to own a portfolio of single-family rentals through a separate entity. Today, Atlas manages more than 4,200 rental units, many of which are owned by institutional investors.

“We’ve seen strong appreciation in single-family rentals across markets that we operate in, and we don’t see that cooling down,” Vincent Deorio, Atlas’ vice president of corporate development, told Denver Business Journal. “There’s always going to be ebbs and flows in the space, but it’s been a pretty steady asset class for us.”

Companies have learned to efficiently manage scattered-site, single-family homes in a similar manner to large apartment operators, Deorio said. Today, institutional players may be more comfortable in the space than they were five, six or seven years ago, he said.

“There’s definitely what feels to be a flood of capital interested in the space,” Deorio said.

While Deorio said the joint venture is on track to reach its forecasted acquisition volume, it’s also encountered housing markets in which inventory has been tighter than expected.

Originally, Atlas expected that just a “small sliver” of the homes purchased through the venture would be new construction, while the rest would be existing homes. Today, about 20% of the portfolio is coming from new builds.

“We’re excited about that. It’s just a little different than we thought,” Deorio said. “And part of that — it’s not like desperation for inventory — it’s just, I think builders are becoming more comfortable with the concept.”

‘Many years of runway’
Reed Ruck had already spent nearly 30 years developing commercial and multifamily projects in Colorado when he first heard of what, back in 2017, sounded like a novel concept: single-family communities built entirely for renters.

That year, he received a call from an old college friend, Josh Hartmann, the founder and CEO of a build-for-rent development company based out of Phoenix called NexMetro Communities.

“He’s like, ‘Hey, have you seen this product that I’m working on?’ And I’m like, ‘Josh, I have no idea what you’re talking about.’” Ruck said. “‘Literally, I’ve never seen this product.’”

But Ruck was intrigued by the niche offering, and joined NexMetro as one of its first employees.

The company, which was founded in 2012, is widely recognized as one of the first movers in the build-for-rent space. Initially, its founders believed the communities, which featured smaller, single-family homes, would attract renters who had lost their homes during the Great Recession.

But a few years later, surveys of renters at its communities showed an entirely different phenomenon was at play. Many were so-called “renters by choice” who, for various reasons — maybe they had just relocated, or gotten divorced, were looking to downsize or just wanted to avoid the hassles of homeownership — preferred to rent a single-family home rather than buy.

NexMetro now has 40 projects and more than 4,800 homes completed, under construction or in development. An additional 20 projects are in pre-development.

The company, which builds under its Avilla Homes brand, says it’s invested more than $1.5 billion in the Phoenix, Dallas, Denver and Tampa markets combined, and plans to move into other U.S. markets.

The company’s first project in the Denver metro, Avilla Buffalo Run, opened in Commerce City in 2019. It was followed by Avilla Prairie Center and Avilla Eastlake, located in Brighton and Thornton, respectively. Combined, the three communities offer about 500 rental homes.

A model home sits among single-family rental homes at Avilla Eastlake in Lone Tree.
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A model home sits among single-family rental homes at Avilla Eastlake in Lone Tree.
SETH MCCONNELL | DENVER BUSINESS JOURNAL

As a managing director at the firm, Ruck oversees operations in Colorado, Florida, Atlanta and Austin, Texas. With each successive project in the Denver metro, he’s noticed increased familiarity with the product type among potential renters.

“We have not even come close to tapping the level of demand” in the Denver market, Ruck said.

Ruck said NexMetro’s goal is to complete between 300 and 500 single-family homes along the Front Range each year.

The company plans to begin construction later this year on a roughly 130-unit project near the intersection of East 96th Avenue and Tower Road, in Commerce City. Three other Denver-area projects are currently going through entitlements, Ruck said, although he declined to share details on their locations.

 

“I think we have many years of runway here,” Ruck said.

As the product becomes more widely known and accepted, Ruck said he expects competition to increase in the Denver area, as it has in Florida, Phoenix or the Dallas-Fort Worth metro.

Bachman, of John Burns Real Estate Consulting, called Phoenix the “mecca of build-for-rent.” Denver, meanwhile, can absorb much more supply without any fears of overbuilding, she said.

“The pipeline for Phoenix is massive — I can easily say it’s in the thousands of units. It’s very mature,” Bachman said. “I would call Denver a market that’s in the early stages of its development and growth. I still think you have a lot of runway and opportunity here in the Denver market for additional supply, additional growth, et cetera.”

Build-for-rent communities could also be poised to play a much larger role in future master-planned communities in the Denver area.

Oakwood Homes is currently building The Front Porch, its first single-family rental community, in Green Valley Ranch. Todd Bloom, vice president of the company’s build-to-rent division, said he views rental homes as direct complements to Oakwood’s for-sale offerings.

“We have a broad reach across the Front Range, from basically Fort Collins down to Colorado Springs, and we are looking to introduce a build-to-rent component in each of our master-planned communities, which will also allow people the opportunity to experience and live in our communities as they’re thinking about buying,” Bloom said.

A landscaper makes his way down a sidewalk past newly finished homes at The Front Porch by Oakwood Homes.
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A landscaper makes his way down a sidewalk past newly finished homes at The Front Porch by Oakwood Homes.
SETH MCCONNELL | DENVER BUSINESS JOURNAL

Denver-based BMC Investments, a prominent developer in Cherry Creek, is taking a similar approach. The company is partnering with Boston-based Rockpoint, a real estate private equity firm, to pursue a new strategy that will focus on building single-family rentals — both detached homes and townhomes — as well as apartment buildings in suburban locations.

The planned projects will serve as the rental components of master-planned communities that otherwise offer for-sale homes. BMC and Rockpoint have more than $1 billion in the development pipeline so far, according to Jeff Stonger, BMC’s chief investment officer.

“This prior strategy of owning and operating homes that are scattered, I think that’s shifting to this new strategy that we’re focused on, which is getting the operational efficiencies of having them all together in one master plan — being able to create the clubhouse and amenities and community for these rental products, but within this larger master-planned community that feels like a traditional, for-sale neighborhood,” Stonger said.

Pros and cons
Jaime Gomez, chief operating officer and deputy director of the Colorado Housing and Finance Authority, said he believes the development of build-for-rent communities could help meet a pressing need in the state, particularly if the homes are affordable for middle-income renters. Denver, and the state overall, may be facing a shortage of for-sale homes, but more rental units are also needed, he said.

“There’s a much greater demand for rental units in this market and throughout the state than there are resources available to build that type of rental housing,” Gomez said. “When you talk about developers building single-family homes for rent, that provides another rental option that I think is really important.”

On the other hand, Gomez worries that increased investor interest in purchasing existing single-family homes and converting them to rentals could exacerbate the inventory crunch, making it that much more difficult for first-time homebuyers to win out in a highly competitive market.

At the end of July, there were just over 4,000 active listings in the 11-county Denver metro, the equivalent of roughly three weeks of inventory, according to the Denver Metro Association of Realtors. That’s well short of the four to six months that would indicate a balanced market.

Because home prices have risen so much over the last year, the economics for an investor to fix and flip a home don’t pencil out, said Jenny Usaj, the employing broker and co-owner of Usaj Realty, a boutique Denver-based residential real estate firm.

“Investors now are looking more at the long-term gain from appreciation, and they’re sitting in the market longer, which is, I think, going to affect inventory, and has affected inventory,” Usaj said. “Investors aren’t going in to flip, investors are going in to hold and to create rentals for the long haul, to get the appreciation gain.”

While large investors are directing large volumes of capital toward single-family rentals, deals aren’t as plentiful as they were in the aftermath of the Great Recession, said Nicole Rueth, producing branch manager of Fairway Independent Mortgage and a member of DMAR’s market trends committee. Rueth also doesn’t foresee a wave of foreclosures that could significantly shift inventory numbers.

Deorio, of Atlas Real Estate, acknowledged that investors are driving up demand and impacting the market. But he also said that the notion that large investors are buying up all the available single-family homes “is a complete fallacy.”

“Yes, there is a reality that there’s more institutional capital in the space, without a doubt,” Deorio said. “But it’s still a relatively small sliver of the entire ecosphere.”

In a highly competitive market such as Denver’s, investors aren’t likely to dramatically overpay for properties “because that means their rents aren’t going to pencil,” Bachman, of John Burns Real Estate Consulting, pointed out.

“They’re not in the business of overpaying for these assets, which is why I think most of them — yes, they’re still trying to acquire where they can — but they’re really focused, a lot of them, on build-for-rent, because they know what they can build it for, they know what they can rent it for, et cetera,” Bachman said. “It provides a very stable investment for them.”

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