The viability of the "build-to-rent" single-family model in tertiary markets

Abstract

This thesis examines an emerging product type, single-family build-to-rent, and tests its potential application in tertiary markets of the United States. The build-to-rent ("BTR") model has proven successful in a number of fast-growing secondary markets, such as Phoenix. However, the attributes of these markets differ widely from tertiary markets. This paper examines the key drivers in Phoenix, such as demographics, land costs, construction costs, cap rates and rents that have made this product successful and compares these metrics against those of tertiary markets in an effort to evaluate whether single-family BTR is a viable product type in those markets. Case studies are used to compare secondary markets to tertiary markets. Oklahoma City, Tucson and Fresno are selected as the tertiary markets based on their varying affordability scores as measured by the Housing Opportunity Index. This index was chosen to test whether homeownership affordability predicts BTR success. While there are different varieties of BTR products, these case studies examine a hypothetical 20-acre project of 160 single-family detached homes of approximately 1,800 square feet each. Untrended Returns on Cost ("ROC") were found to be similar to Phoenix in Oklahoma City and Tucson. However, due to the slower rent growth and higher cap rates of these tertiary markets, Internal Rates of Return and Equity Multiples were found to be too low to justify this specific BTR design. However, further institutionalization of this asset class and a reevaluation of the pricing of SFR volatility has the potential to lower cap rates to a level that justifies the BTR product in tertiary markets.