Is the BTR Market Already Overheating?

The build-to-rent sector has emerged as one of the most sought-after investments in commercial real estate, but the fervor might be contributing to an erosion of fundamentals, according to Mark Wolf at AHV Communities.

“Everything is build-to-rent these days. When a sector gets overheated, like this one is, that is usually when those lines get blurred. You have $80 billion chasing a sector that is relatively new, and I believe there is an erosion of fundamentals,” Wolf tells GlobeSt.com. “Whenever there is an imbalance of capital seeking product, cap rates tend to compress and valuation mechanisms go through the roof, but investors also loosens their parameters in an attempting to deploy capital quicker.”

Location is the biggest challenge for BTR properties, according to Wolf. To place capital and invest in this market, some developers and investors are building these communities 20 minutes to 40 minutes outside of the city center, which Wolf says is too far. “I think that is a high-risk proposition,” he says. “Right now, there is a shortage of housing, but in a normal market, people are going to be less inclined to rent those properties if they can find something better located.”

AHV Communities is a firm believer in the build-to-rent space, but Wolf says that the company has a specific definition of what that means. For AHV, build-to-rent is a new contiguous community of single-family homes that are managed, maintained, amenitized and built for rent, and in terms of the location, they are centrally located. “That is a new concept. That is where build for rent came from,” says Wolf, who explains that they have been using term “build-to-rent” since 2014.

However, many investors have a much broader view of the single-family rental market, which includes buy-to-rent (buying a portfolio of single-family homes to rent out), vertical multifamily and build-to-rent communities in undesirable locations. These broad definitions of the asset class are contributing to destabilization. “We are this part of the cycle where the poorly located projects are going to see some headwinds,” says Wolf. “We are approaching the overheated phase of the lifecycle in this very young asset class.”

Although the market is getting overheated, Wolf remains fundamentally bullish on the asset class, as long as the investments are true to the core fundamentals of this sector. “This asset class has another 10 or 20 year run,” he says. “I think this asset class is going to be here for a long time.”