Build-to-Rent Homes Looking to Capture Sizable Chunk of Housing Market in Arizona

By Naveen Athrappully
Naveen Athrappully
Naveen Athrappully
November 9, 2021 Updated: November 9, 2021

Coupled with low supply inventory, rising home prices and more people moving into the valley, there’s a new trend taking shape in Arizona, where residential properties are being built to rent out rather than sell.

“It’s actually a fairly new form of residential real estate that really didn’t exist five or six years ago,” Randy Grudzinski with Empire Development Group told ABC15. The build-to-rent trend is mainly driven by demand, which, according to the Arizona Department of Housing estimates, comes to around 250,000 more homes and apartments needed right now in the state.

Builders are constructing these new units all around the Phoenix Metropolitan Area, also known as the valley. There are 52 active build-to-rent communities with 165 more planned locations, according to the Land Advisors Organization, a large land broker in Phoenix.

When looking at numbers across the country, there has been an increase of 30 percent build-to-rent homes from 2019 to 2020. Six percent of all new homes built are part of the trend, with numbers expected to double in the coming decade.

The fastest-growing sector in the housing market is set to upend the American dream by catering to those who cannot afford the homeowner’s initial down payment.

Mostly, the homes in Arizona are tiny one or three bedroom cottages with smart features, a petite backyard and modern amenities like common pools and security. The rental prices in The Villages, a community with 204 units on 18 acres, range from $1,500 for a single bedroom to $2,400 for a three bedroom unit.

Many of the occupants of build-to-rent homes are millennials and empty nesters.

“The whole idea of buying a home, that starter home that we’re all familiar with, has just become so unattainable to the average young couple getting started out there or even just singles in that group,” Grudzinski said to ABC15.

Before the pandemic, people preferred living in amenity-rich big city environments that were close to work. But that perception has changed with remote opportunities like working from home, where costs are lower and quality of life is comparatively higher.

Developers are selling suburban living combined with rental advantages like predictable and lower maintenance costs, shared amenities, property management, and lower overall transaction costs.

With hefty credit card debts and student loans, adults under 35 have the nation’s lowest rate of homeownership, at 37.8 percent, according to the Census Bureau. The national rate of home ownership, meanwhile, continues to plummet.

Then, there are the institutional investors. “The single-family home market has become an inevitable asset class for institutional money,” Aaron Graf, chief executive of the New York City real estate brokerage LG Fairmont, told The New York Times.

“A normal buyer can’t compete with an all-cash offer from an institution, especially if it comes in high. Young people are thus being priced out of the starter single-family home.”

Besides these factors, there is a growing trend towards not saving money towards investing for a home and maintaining it. “There is a narrative being pushed on young people that it is better to rent than to own,” Graf told the NY Times. “This trend will be devastating for young people’s ability to build wealth, as housing is the No. 1 wealth builder.”

While Arizona-based build-to-rent developers are expanding into more cities across the country like Dallas, Tampa, and Denver, investor money is flowing into the rental business. “We’ve got clients, multiple, well over a couple of billion dollars worth of capital looking to place in this space,” said the executive vice president of SVN/SFRhub Advisors to CNBC in 2019 regarding the build-to-rent model housing.

Another firm, Toll Brothers, announced in the same year a $60 million joint venture to form a build-to-rent company.