Residential: Growing build-to-rent market luring prospective millennial homebuyers

In 2018, only one-third of millennials under 35 years old owned a home – nearly 10 percentage points lower than earlier generations during the same ages, according to the Census Bureau.

Unwavering growth in home prices and record low inventory in the housing market is one factor crowding out first-time millennial homebuyers. A recent explosion in the single-family renting market, however, may also be playing an increasingly significant role in millennials’ decision to turn to renting over homeownership.

“There are a lot of creative forces out there in the marketplace, from builders to institutional investors, trying to find ways to entice millennials to rent,” Tim Rood, managing director at SitusAMC, told CNBC’s Dominic Chu during a recent interview.

CNBC reports that institutional investors and homebuilders are throwing their weight behind the build-to-rent market, with companies like Lennar expanding its development of build-to-rent communities and Toll Brothers announcing a $60 million joint venture investment with BB Living, a company specializing in luxury rental communities.

Although these build-to-rent homes account for only about 5% of single-family housing starts, the rate of development has increased in recent years. From 2017 to 2018, the number of new constructions built solely for renting grew from 37,000 to 43,000, according to the National Association of Home Builders.

Real Estate Investment Trusts (REITs) are also getting into the build-to-rent market. National Real Estate Investor reports that more than 30% of the $150 million in homes acquired by American Homes 4 Rent during the third quarter of 2018 were new constructions built for renting.

“Millennials are now creating the households that we’ve long anticipated, which is fantastic,” said Rood. “But we’re starting to see a break as more than half of these millennials are choosing to rent over buy.”

The rental market is going strong with projected occupancy rates of existing rental properties of approximately 95% this year, according to the National Apartment Association. Average rental costs continue to rise. Notably, John Burns Real Estate Consulting reports single-family rents have seen more than 4% annual growth, compared to 3% growth for multifamily apartment building.

“There is a lot of smart money chasing this trend, but there could be negative implications for the overall economy,” said Rood. “I’m hopeful that we’ll find a way to incentivize and even subsidize millennial households’ ability to purchase a home and begin building wealth.”

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