Takeaways from IMN’s Build-To-Rent Conference
There is an abundance of liquidity in the debt market, while equity capital remains relatively scarce in the sector. The pool of private lenders has increased substantially across multiple products, making debt capital readily accessible though not inexpensive. With more new entrants and increased allocations to land banking capital, AD&C loans, bridge loans, and permanent financing, there are a lot of financing options across the build-to-rent ecosphere. We recommend that operators commit to smaller financings, allowing flexibility to secure more favorable terms should rates decline.
Certificate of Occupancy (“CO”) deals are attractive to a wide audience. Most build-to-rent aggregators are targeting current and upcoming home inventory, motivated by the perception that prices remain below replacement cost. While both buyers and sellers are willing to transact, the persisting bid-ask spread has continued to limit transaction volume.
What are today’s cap rates? With limited deal flow in today’s market, cap rates remain largely unclear. Most groups underwrite new deals assuming a 5.25 - 6.0% exit rate, requiring a spread of at least 150 bps – equating to a 6.75 - 7.0% Yield-to-Cost, to justify new development investments. Due to market uncertainty, only un-trended yields are being considered by all parties.
Operating rental homes is harder than building them. While sourcing land and constructing homes presents challenges, seasoned BTR operators remain focused on meeting target operating profits (NOI) for existing assets. Owners are prioritizing controllable factors – optimizing lease-ups, managing turns, and proactively minimizing capex. Assets with higher NOI garner more attractive financing terms and exit values.
Building homes is also increasingly challenging. Even in the best of times, delivering new homes requires managing countless moving parts. While land prices are softening slightly, the impact on margins remains minimal. We estimate that sticks and bricks account for roughly half of a new home’s COGS, with rising costs driven by tariffs, supply disruptions, Canadian beetle infestations, and supplier price gouging. Simultaneously, ICE raids on jobsites nationwide are currently disrupting production schedules and will put upward pressure on labor costs. We recommend that our operator clients use a cost-plus pricing model for BTR endeavors.
For many young adults, renting is – and will continue to be – much cheaper than buying. Persistently high interest rates continue to challenge affordability for young, aspiring homebuyers, with the average first-time homebuyer now 38 years old. This growing demographic of family renters, coupled with limited new housing rental supply, supports the build-to-rent sector’s fundamentals through 2026 and beyond. Professionally managed, high-quality single-family homes are an important component of the housing ecosystem and are poised to win market share from the multifamily business.
