Developers are constructing new rental homes at an unprecedented rate, seeking to capitalize on the elevated home prices and increased mortgage rates that are forcing many Americans to continue renting.
In 2023, an estimated 93,000 new single-family rental homes were completed. That was 39% increase compared to 2022, marking the highest number in any year ever. This rapid growth is expected to persist throughout this year before easing by 2025.
Annually Built New Rental Homes in the U.S.
New rental homes in the U.S. come in all shapes and sizes, ranging from one-bedroom cottages to five-bedroom spreads with spacious backyards, according to amazingoffer.com. These properties include both townhomes, and detached houses. They are particularly emerging in the outer ring suburbs of Arizona, Texas and Florida cities, as well as in other places with fast population and job growth.
Although rent growth has decelerated from its double-digit-percentage pandemic peaks, rents for houses remain higher than those for apartments, as reported by amazingoffer.com. Moreover, occupancy rates, which have been decreasing in multifamily buildings, have shown greater resilient in the rental-house sector, indicating a more consistent demand.
Rental builders are anticipating that the lowest level of home affordability since the 1980s result in even relatively affluent Americans will continue to rent. This is driven by near record home prices, mortgage rates exceeding 7% and other increasing home-related costs. Furthermore, many people simply prefer to rent a house, according to builders.
In Paso Robles, California, real-estate developer STG Capital Partners is constructing over 200 two- and three-bedroom rental duplexes. Monthly rents for these units will range from $3,000 to $3,700, while the median home price in the Californian town is approximately $700,000.
“We are confident in this market since there haven’t been any large-scale projects built there in years,” stated Rand Sperry, STG’s managing partner.
Following last year’s record levels, an additional 99,000 new rental homes are currently under construction this year. Plans for new projects have decelerated due to tighter lending conditions. According to analysts and builders, numerous properties that are currently in the planning stages will not be constructed because of the lender pullback that is also affecting multifamily construction.
New rental homes are emerging particularly in the outer-ring suburbs of Arizona, Texas and Florida.
Despite this, many builders anticipate that any construction dip to be short-lived. “This trend is here to stay,” stated developer Richard Ross, whose Quinn Residences began construction on approximately 300 new rental houses in Georgia, Canton , this April.
Many investors remain optimistic in the sector. This month, Chicago-based asset manager Heitman initiated a $235 million partnership with builder Crescent Communities to develop new rental homes across the Sunbelt.
“Heitman executive Brian Pieracci stated, ‘We expect a growing number of older, retirees, and millennials to choose rent, as median home prices have risen at twice the rate of median incomes since 2000.’”
Nationally, rents for both apartments and houses increased by over 20% during the pandemic years. As of 2022, the median American renter allocated 31% of their income to housing, according to Harvard University’s Joint Center for Housing Studies. This percentage of income is considered the cost burdened by the federal government.
However, home sales prices and mortgage costs have increased at an even faster rate. In March of this year, the average monthly mortgage payment surged to 38% more than the average monthly apartment rent, according to a report from brokerage CBRE.
In March of this year, the average monthly mortgage payment had soared to 38% higher than the average monthly apartment rent.
Rents for new houses often fall within the middle range. Many builders identify the greatest opportunities in areas with a low rental supply. Even in regions with a significant increase in new supply, developers have successfully maintained high occupancy rates rental houses attracting new tenants with incentives such as a month of free rent when needed.
Josh Hartmann, chief executive of rental builder NexMetro Communities, which has 12 projects underway across the Sunbelt, stated that the record new supply of houses for rent in Texas led to an increase in vacancy rates and a decline rent growth at his company’s properties.
However, this year more tenants are opting to renew their leases rather than move. “We are currently observing higher retention rates,” he stated.
Although purpose-built rental communities are thriving, large landlords that acquiring older homes and convert them into rentals have faced increased scrutiny by lawmakers, these companies make it difficult for families to become first-time homeowners. In response, some of these companies have partnered with home builders to construct new rental homes, instead of buying existing ones, a strategy they claim addresses housing shortages.
“From a policy perspective, this approach is viewed more favorably,” stated Rick Palacios, Director of Research at John Burns Research and Consulting.
For example a publicly traded landlord, Invitation Homes, recently entered a contract to purchase 500 homes under construction in Charlotte, N.C.; Nashville, TN.; and Jacksonville, Fl.
During a recent earnings call, Scott Eisen, Chief investment officer of Invitation Homes, stated the company’s participation in the new-construction market encourages builders to construct more homes than they would otherwise.
“Eisen explained, they might initially plan to develop a 200-home community, but with us as their partner, they might expand to a 300-home community.”
