Built-to-rent communities find rapid success in Phoenix

Mark Stapp

Shelley Marie Valdez

Randy Grudzinski

(Submitted photo)

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By Melissa Rosequist
Mail | Twitter: @mrosequist_

Adults in the rental market are finding built-to-rent communities may be the best of two worlds — a dwelling with benefits of a single-family home without the longterm commitment or financial needs required to get a mortgage.

Built-to-rent communities arrived on the scene around 2008, emerging in recent years as developers sought to diversify housing for consumers and cater to markets that either did not want or could not afford a new home, but wanted the trappings of the single-family life.

“I think one of the reasons why there’s so much attention placed on it now is that it’s become much more prevalent, the market has expanded for this product type, especially since 2017,” said Mark Stapp, a professor at Arizona State University and director of W. P. Carey Master of Real Estate Development.

Historically, housing options included single-family neighborhoods, condos or town houses or apartment complexes. Built-to-rent communities offer the luxury of individual homes that can include yards, space from neighbors and a neighborhood feel, with the luxuries of rental units.

Real estate professionals say this version of homes is filling a need for young families, single adult professionals and aging adults who are not in the market for homeownership for one reason or another. It’s a popular option in markets like Phoenix and Texas, but isn’t appropriate everywhere.

“You’re going to need 20 acres, so sometimes it’s hard to find that in places like California — you can’t do it there. In New York, Chicago where there’s population decline, there’s excess housing. Us and the players are really going to where the people are moving and where the jobs are going,” said Randy Grudzinski, head of capital markets for Empire Group of Cos., one of the developers of the single-family rental communities.

The built-to-rent concept was born in Arizona, Stapp said, and that’s one reason Phoenix is considered its top market.

“These other markets really only began to have this product type in the last five years,” Stapp said. “I think there’s been somewhere around 6,000 units added since 2017. Up until that point, the product existed but it was relatively minor component of the housing market.”

Scottsdale-based Empire Group is behind several built-to-rent communities around the Valley, having put forward about 1,500 units across the Valley since 2020, according to its website.

Stapp says amid the housing inventory shortage, the more choices that can be provided for a great range of wants and needs, the better the real estate market will be.

The future of built-to-rent may depend on the local regulatory and political environment, Stapp says.

“You have to able to get the entitlements, the right to build these things. Is there a finite amount of available space for these to continue to grow at the rate they’ve been growing?” Stapp said. “Capital markets like them a lot, so you had a lot of money that moved into that segment. There was a lot of additional inventory added, it’s probably going to soften a little bit over the next year or two, and then pick back up again.”

Stapp says so many built-to-rent units were added in the past couple of years, coupled with the high cost to build right now, may dampen the trend for a bit.
“As long as there’s investor interest and there’s a segment of market that wants and needs this, you will find demand for it,” Stapp said.

Catering to needs

Today, it’s not uncommon for single adult professionals to live alone; or people in the second-half of their life looking to downsize their home.

“This whole build-for-rent came out of the Great Recession and people recognizing there’s a whole segment of society who would rather rent their home, but also don’t want to be in an apartment building,” Grudzinski said. “That’s sort of how it all started."

From the developer or property manager’s perspective, having multiple units located together, and made of the same materials, makes sense.

In the Great Recession, when there were numerous foreclosed houses on the market, real estate investors purchased those properties and rented them out.

But, that model wasn’t perfect, Grudzinski said.

“What we noticed was it was a great business from the revenue side,” Grudzinski said. “The problem was, you had these homes that really no two of them were the same, they’re spread out all over a huge metro area. A mechanic had to fix an air conditioner in one building and then drive an hour to the other side of the Valley to go fix another one; the mechanicals weren’t the same between the HVC and another one — it’s much more difficult to manage from a cost side.”

What they did learn in that post-Recession period was that the tenants who rented out detached homes tended to be good tenants, Grudzinski says.
“How can we still capture that tenant base that we really like but do it in a more scalable manner? The solution was, well we’ll build little homes but instead of for sale, we’ll do build for rent and we’ll put it in a gated, walled community,” Grudzinski said.

The built-to-rent properties take up space, though, and infrastructure. A traditional apartment complex can be built on a postage stamp — often times just a couple of acres in a dense area of the city. These built-to-rent communities are taking up a significant amount of acreage, which limits where they can be built.

Grudzinski says there are differences to a vertical build and one spread out across 20 acres. For example, Empire Group is putting in storm drains, sewers and electricity on these community plats, whereas a vertical apartment complex needs an elevator, multiple stories, cranes.