Here's What Local Capability Means To Making BTR Projects Pencil

Attom Data's latest Rental Affordability Report offers two headline insights for the price of one.

It's cheaper in most places to rent than own in '23 [a flip-flop from 2022]
In more than three out of four markets [222 counties in all], renting requires more than one-third of an average local household's earnings per month.

As an added bonus, the report notes:

Average fair-market rents are increasing more than average local wages in 156 of the 222 counties analyzed in the report (70 percent), including Los Angeles County, CA; Cook County (Chicago), IL; Harris County (Houston), TX; San Diego County, CA, and Orange County, CA (outside Los Angeles).

Average local wages are growing faster than average rents in 66 of the 222 counties in the report (30 percent), including Maricopa County (Phoenix), AZ; Dallas County, TX; Clark County (Las Vegas), NV; Tarrant County (Fort Worth), TX, and Hillsborough County (Tampa), FL.

Added up, the data tell of a market that's pricing out more households than pricing them in, and stymieing ground-up residential development's role in near-term solutions.

But you know that.

Affordability. Attainability. Access. With "housing" attached to each, these terms – although they're profoundly real for those who find themselves priced out of housing's market-rate portfolio at faster and faster rates – are also terms prone to the risks of misuse, overuse, and fast-and-loose use. They deserve focus. They also merit disentangling a bit as barriers so that solutions – for what they are and can be in housing's private sector business community – can emerge out of confusion.

Need, demand, want. When it comes to access to safe, decent, attainable homes, these terms traffic in many cases as if they mean the same thing. They don't. Conflating one with the other adds confusion, and raises barriers to solutions. Let's remind ourselves – at a moment economics and business outcomes hinge on acceptance of reality rather than a narrative version of it – about demand.

Here are five well-stated rules that characterize demand:

The law of demand concerns consumers' changing desire to purchase goods and services at given prices.
Demand can refer to either market demand for a specific good or aggregate demand for the total of all goods in an economy.
Demand and supply determine the actual prices of goods and the volume that changes hands in a market.
Businesses study demand to price products to meet demand and generate profits.
The demand curve demonstrates visually how the decreasing price for a product increases the quantity purchased. – Investopedia

Willingness and wherewithal – i.e. not being priced-out – play key roles in demand, either market or aggregate. Supply either serves those with both willingness and wherewithal or one of two results happen. One: they don't serve those without wherewithal – those who are priced-out. Or two: they lower the barriers and price in more potential renters or owners, if the sector is housing.

Lowering those barriers without sacrificing an acceptable, sustainable minimum gross margin describes – in one format or another – the generalized challenge of today's mixed-signals economy.

Capability – an all-cylinders machine of operational experience, deep and engaged working relationships, clean, constantly updated, single-source-of-truth data, and adaptiveness to local conditions – is residential construction's best shot at removing cost obstacles within a profit-motive model.

Time, money, materials waste, first-time quality – the dollars tied to these valuable resources, once captured, can find their way back into both growing margins and greater investment in matching products and property locations to more people who need, want, and can pay to live in them.

In 2023, even though the jury's not yet in on the level and duration of economic turbulence, we know those who'll power ground-up residential real estate and construction's baby steps into a future that prices-in rather than prices-out more households are ones who'll release economic efficiency from its long-time catch-22 traps. They'll leverage data – the kind that sees around corners, pierces thick layers of habit, and re-assembles process from the boots-on-the-ground level to the corporate headquarters – that redoubles human effort, excellence, and impact on housing affordability as a first-principle goal.

One of 2022 and 2023's bright-spots in the kind of ingredient-brand capability that may begin to prod the baby steps into a more affordable rental and ownership housing future is Mosaic, the nation's fast-growing multi-stack hyperlocal general contractor with a technological and data central nervous system.

Mosaic just announced its beachhead – its 11th market outpost in the U.S. – in a hyperactive southwest Florida that continues to show real demand resilience for both for-sale and new single-family rental community living.

A Mosaic statement notes:

Mosaic’s process allows us to bring our collective BTR learnings, and what we’re seeing in real-time on current job sites to these new markets, while keeping our construction operations executing at a very high level. Our focus upon entering new markets is to build alignment with local trade partners and project stakeholders, before commencing projects with an experienced and capable team ready to execute,” said Ray Gonzalez, Executive Vice President of Operations. “This approach allows us and our developer partners to scale into new markets, for them, without changing their GC operations every time.”

The last five to seven years have proven in no uncertain terms that single-family rental living – and particularly the intentionally ground-up built-to-rent community platform vein of housing offerings – is a residential investment, development, and construction "keeper." People of varying ages, economic brackets, and discretionary housing means – in more and more metros – gravitate to BTR for financial reasons and by choice.

Mosaic notes:

Unlike a for-sale product, the BTR model always exists within a managed community composed entirely of other BTR homes. This means living around other renters who likely share common lifestyle goals.

When analyzing the overall force behind BTR’s growth among today’s modern renters, the most noteworthy driver is the large swath of millennials who are adopting dogs, starting families, and working from home. These up-and-comers are eager to trade their downtown balconies for bigger backyards and neighborhood parks. For this group, buying a home in the ‘burbs felt like the traditional next step, but it hasn’t panned out due to an unsustainable market that has rendered the dream beyond reach, at least for the moment. This is a result of today’s macro conditions – a cacophony of high mortgage rates, high median housing costs and a sheer lack of starter home inventory. An uncertain economy hasn’t helped, prompting both sellers and buyers to wait for brighter days."

However, while BTR is now accepted as consumer trend with legs, and real estate investment, development, and construction players of every stripe are jockeying to scale up profitable and dominate, another reality has become clear. And that clarity has sharpened in the past 10 months or so as both operating and construction costs and the much heavier cost of financial capital has wreaked havoc with investment pro formas.

It's two stark areas of recognition:

Not everybody will be a winner in BTR; and the other side of the same coin is that many could be big losers.
No current strategic and operational model matches up as a perfect fit for sustainable success in BTR's evolving place as a residential outlier.

To that second point, while single-family for sale homebuilders might logically appear to have an edge in the space in terms of experience in product design, construction processes, and business rigor, making the numbers work has shown itself to be a brain-breaker.

One strategist we speak with with a perspective on the challenge for legacy single-family builders foraying into BTR says:

They really aren't close yet in terms of getting their costs to where they'll be able to deliver to a pro forma," he says. "They'd have to look at the commercial players – apartment builders – where you don't have a penny drop to the ground without being caught. They're ruthless on their costs, and homebuilders have a way to go if they're going to get there."

This puts a partner like Mosaic into the crosshairs as a solutions provider.

You don't have a brand new asset class in real estate come along very often," Ron Gonski, senior vp of growth at Mosaic, tells us. "In an industry like real estate that is trust and track-record-driven, the BTR opportunity – which is still brand new – is going to lean into trusted local alliances and expertise. And, in the few years we've been at it, the importance of getting the right information to the right people at the right time has been our No. 1 focus to help our partners make smarter decisions.

We found that 96% of all data generated in construction goes unused, and that led us to commit and invest in more resources to develop everyday, boots-on-the-ground data and information that sees action all the time."

Mosaic's value proposition has caught on so firmly that demand for its platforms in markets – especially ones right now in the Southeastern states of Georgia, the Carolinas, etc. that are hotbeds of either shovel-ready or pending built-to-rent community development – eclipses its ability to expand that fast.

"We started 1,000 units in the last quarter of '22," says Gonski. "We'll be more than doubling that in the first half of '23. Our biggest adversary in the way of growth is the capital markets. That's made things unpredictable, but also kind of exciting. At the end of the day, if we're not building more, all we're then doing is creating problem – pricing out more households – for tomorrow. We're working to bring capability to span that mismatch.