4Q ’21
4Q ’21
4Q ’21
2014 – 2022
Credit: https://f.tlcollect.com/fr2/122/22302/Q4_2021_Market_Update.pdf
As a housing solution, single-family built-to-rent (B2R) is gaining serious momentum across the country. Major players, including large private equity firms, investment funds, and public home builders, are all entering the space with lofty goals.
Demand and activity in single-family B2R is surging, especially in secondary markets. With so much capital flowing into the business, key issues are emerging that affect its long-term viability. That’s because a large portion of the newer players in the space are heavily focused on short-term return on investment (ROI), with business plans leading them to deliver new communities in undesirable locations and some taking on roles beyond their skill set.
The fact is, B2R communities destined for long-term success are optimally located, well-designed, and consistently maintained to attract quality tenants and ensure long-term asset value. They are also operated and managed on-site like a well-oiled multifamily community. And yet just a small number of the newer single-family B2R developers are creating communities that meet these key criteria.
Institutional capital has been active in single-family rentals since the global financial crisis 15 years ago, when large investors began purchasing, aggregating, and leasing distressed, foreclosed homes.
But until recently, most investors failed to recognize the legitimacy of another major single-family rental business model: newly built rental homes set within contiguous master planned communities. Now billions of dollars are being spent pursuing those B2R development opportunities.
There are benefits to the private equity cohort finally buying into this B2R community model. However, the volume of capital being raised is problematic because actual deployment of the opportunity is challenging, at best. As a result, some of these large capital sources have begun to step into roles completely outside of their wheelhouse.
Blue-chip private equity firms are now forgoing traditional operating partner relationships and developing and managing B2R communities on their own. Taking on this new role positions them as competitors to industry veterans that, in the past, invariably educated these same capital providers when they were seeking equity partners to capitalize new communities.
Private equity firms have never been developers or operators of the communities they finance, so we must ask: By taking on those roles, are they able to fulfill their primary duty as a fiduciary? Are pension funds, endowments, and institutional investors comfortable with their investment managers wearing the developer and/or operational hat?
Private equity firms are not experts at those aspects of the business, and even if they hire a team for the job, it’s still risky. There’s also a strong likelihood that because of the sheer volume of capital being raised today for B2R, many will never build all of the communities they seek to develop, despite having raised the money to do so.
Some of the country’s largest production home builders have also joined in the single-family B2R frenzy. The appeal undoubtedly comes from the ability to sell numerous newly built homes in a single transaction to an operator or investor (as opposed to selling one house at a time to consumers within a for-sale community), thus generating quick ROI and being a boon to revenue and earnings.
In addition to a dramatically decreased sales cycle, builders also are attracted to the opportunity to sell to an operator that is less influenced by interest rates and the other details that concern individual homebuyers.
In many ways, it makes sense for traditional for-sale builders to be involved in B2R. But because their main goal is instant profit, they likely aren’t building with as much concern for the longevity of the home or for the community design and how they will be amenitized, leased, and maintained over time. They are often selling their homes to investment funds that are no more adept at driving long-term value. And in many cases, fewer than 50 homes are sold in a given transaction, which makes long-term on-site management financially unfeasible, to the detriment of the maintenance, quality, aesthetics, and marketability of the homes and the community over time.
As is true with all real estate, location matters. Yet, increasingly, B2R communities are being developed in places that aren’t proximate to major employment centers, services, or attractions. In the long run, this tendency to build on the outskirts will weigh heavily on whether these communities succeed or not, as they likely experience a steady decline attracting quality renters and top-of-the-market rents, eroding their asset value.
The cost of land today is undoubtedly tied to this dynamic, as entities focused on short-term ROI are unable or unwilling to pay higher prices for land developed for rental housing.
Additionally, the volume of capital raised for B2R investment, which must be deployed quickly, is leading some to settle for or to choose poor locations—a short-term view.
Unfortunately, the long-term consequences of bad community locations can never be reversed. By contrast, urban-adjacent, infill locations near grocery-anchored retail and employment centers are optimal. While pricey, the value of these sites and communities will hold over time.
Today, there are relatively few players delivering contiguous, master planned B2R communities, and fewer still operating a vertically integrated business, building and maintaining the communities themselves.
Arguably, the best model for these communities—what we’ve trademarked as “Built-for-Rent”—is one that is functionally integrated, where communities are well-located, offer superb amenity packages, are professionally managed on site, and, ultimately, are treated and operated like a traditional apartment business. As an industry, we must strive to follow this model toward lasting community value.
Credit: https://www.probuilder.com/built-to-rent-sector-operational-challenges?oly_enc_id=2026A2607790C5L
Rising interest rates and seemingly endless supply chain disruptions are driving up home costs, leading to the lowest affordability level on record, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI). Just 54.2% of new and existing homes sold between the start of October and end of December 2021 were affordable to families earning the U.S. median income of $79,900, down from 56.6% of homes sold during the third quarter of 2021.
The national median home price increased to a record $360,000 in the fourth quarter of 2021 after gradual increases throughout the first three quarters of the year, and average Q4 mortgage rates also rose to 3.16%, up by 21 basis points from the previous quarter. As mortgage rates continue to surge and homebuyers compete for an inadequate supply of homes, prices will keep rising late into 2022, NAHB’s Eye on Housing reports.
The HOI shows that the national median home price increased to a record $360,000 in the fourth quarter, up $5,000 from the third quarter and a whopping $40,000 from the first quarter. Meanwhile, average mortgage rates increased by 21 basis points in the fourth quarter to 3.16% from 2.95% in the third quarter. Currently, mortgage rates are running above 3.5%, and this higher trend will further affect affordability later this year.
Lansing-East Lansing, Mich. was the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000. There, 90.6% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $79,100.
Meanwhile, Cumberland, Md.-W.Va. was rated the nation’s most affordable small market, with 94% of homes sold in the fourth quarter being affordable to families earning the median income of $60,800.
It’s safe to say that 2021 did not go as planned, but the Kansas City retail market held its own. Heading into spring, COVID numbers were trending down and the world seemed to be on its way back to “normal.” However, numbers began to soar again in the second half of the year. But in year two of COVID, the economy’s reaction was drastically different. As a society, we learned how to weather the storm in some manner and continue to function. While in 2020, we collectively put the brakes on the economy, in 2021, we seemed to say, “We can make this work.”
Looking at the raw numbers, the Kansas City Metro’s retail market was steady. Average lease rates and occupancy rates across the total metro rose only 1% and 2% respectfully. Categorized by type, community centers and strip centers saw small increases in both metrics, while lifestyle centers, regional centers and power centers all saw a drop in occupancy. Lifestyle centers increased the average lease rate by nearly a dollar, but regional and power centers dropped by as much or more. Every one of the 9 counties included in the Kansas City metro reported taxable sales at least 10% over the first half of 2020.
Data is only one part of the equation. The other is momentum. In contrast to 2020, activity in the market is palpable. Leasing activity is up, progress is being made on long-standing developments, new restaurants are opening, new concepts are moving in, and deals are getting done.
However, several tenants made bold moves in the KC market this year. With a little help from our friend in red and gold, Whataburger entered the metro, opening two locations in 2021, with plans to open a whopping 10 additional locations in 2022 and two more in 2023. Kansas City-based Hawaiian Bros opened its first location in 2018 and has since boomed to 11 area locations, five of which opened in 2021 and one which will open in 2022. Nationally, the chain has expanded to 29 locations across six states. Other new to KC concepts include Ollie’s Bargain Outlet, Wall to Wall Wine and Spirits and The Painted Tree Boutique.
Some of the largest projects in the metro made significant progress in 2021, and other new initiatives were announced. The Kansas City International Airport continues to make progress toward completion in Spring 2023. Lenexa City Center has continued to grow. The owners of Kansas City’s National Women’s Soccer League team announced the nation’s first NWSL-specific stadium will be built at Kansas City’s Berkley Riverfront Park.
More detials on the original report: https://www.lane4group.com/2022/01/2022-kansas-city-retail-report/
M R Capital Advisors LLC 