How BTR Projects Can Pencil In A Repriced Debt, Equity Regime

John McManus -

As housing affordability challenges intensify and attitudes toward homeownership evolve, build-to-rent (BTR) is now a bedrock. In a decade or so, it has become a vital residential real estate sector component.

And just like any part of the living-breathing residential real estate ecosystem, the devil is in the details.

Co-Star News' Paul Owers reported a few weeks ago:

Trilogy Investment Co. had planned build-to-rent houses in Tallahassee, Florida, as well as in Winston-Salem, North Carolina, and Winder, Georgia. Instead, Trilogy ended up selling the sites to builders of for-sale homes, including Miami-based Lennar.
The build-to-rent concept does not work financially in some areas where rent growth is moderating as supply increases, Jason Joseph, CEO of Alpharetta, Georgia-based Trilogy, told CoStar News."

Despite an often dizzying array of coming-of-age challenges complicated by a wholesale repricing of debt and equity since the Fed's early-2022 interest rate ramp-up, what's not in question is this: The single-family build-to-rent trend is not merely a blip response to market conditions.

The asset class – or rather the intentional neighborhood development of horizontal, single-family living – has increasingly become a "new normal" in housing. Younger households, particularly millennial and GenZ adults and young, forming families, are redefining the American dream — not solely in terms of owning a home but in securing the lifestyle benefits that a single-family residence offers, such as a backyard and a sense of community, without the financial burdens of ownership.

Nate Gibson, CEO of McGuinn Homes, sums up this shift like this:

When my parents were growing up, the American dream was homeownership. For millennials and the next generations after that, having a backyard is the American dream. The ownership piece of it went away."

This change in perception is crucial as it underscores the rising demand for rental properties that offer the advantages traditionally associated with owning a home. This paradigm shift is not limited to younger demographics; even 55+ households are increasingly drawn to the fuss-free convenience and flexibility that BTR communities provide.

Market Dynamics' Impact on BTR

Recent (Arbor Realty) data highlights that BTR projects are at an all-time high in terms of construction starts, driven by the ongoing challenges of homeownership affordability, which has decreased by 37% since the pandemic. However, the rapid growth in BTR developments has not tracked without challenges. Markets like Atlanta, Charlotte, and Tampa are seeing absorption rates that lag behind new deliveries, leading to rising vacancy rates and pressuring the financial viability of these projects. Additionally, the high borrowing costs and legacy effects of inflation have created a tougher economic environment for developers and investors.

In response, investors and developers are pivoting to more affordable, smaller-sized homes within BTR communities to maintain rentability and meet adjusted return expectations. Geographic diversification and flexible product offerings are becoming increasingly critical strategies to mitigate risks and align with the new economic realities of the market.

Enabling Efficiency

The success of BTR developments hinges on delivering homes quickly and cost-effectively, allowing investors to generate pro-forma-ed rental income with minimal delays. This is where construction firms like McGuinn Homes play a pivotal role. Columbia, S.C.-based McGuinn specializes in vertical construction solutions that significantly reduce cycle times and costs, making BTR projects more financially viable.

Wade McGuinn, Founder and Managing Shareholder of McGuinn Homes, explains:

The time value of money is that we could cut cycle times, typically, in half. And so this is very attractive to how they [developers and investors] do business." McGuinn Homes’ approach is grounded in its experience with consumer sales, which has driven them to design highly efficient homes. "We always focused on what we called the underserved client in the new home market... We figured out how to build houses people could afford, at a price lower than our national competitors, while maintaining the margins we needed," McGuinn adds.

However, McGuinn Homes's team's deep local relationships and understanding of regional markets set them apart in today's challenging economic environment.

Nate Gibson, CEO of McGuinn Homes, emphasizes the importance of these connections:

We’re from here. We see those people. We hang out with those people at church. We see them in the grocery store."

These relationships with local officials, construction partners, and other intersecting business entities are not peripheral to the process — they are integral to making projects pencil in a high-cost, high-borrowing, high-stakes era.

Gibson notes that local expertise allows McGuinn Homes to navigate the complexities of permitting, land use, and other regulatory challenges more effectively than outside players might.

We do have those relationships... Wade’s been in the industry in the region for 39 years, and that respected position allows us to move projects forward with a level of trust and efficiency that’s difficult to replicate."

Moreover, McGuinn Homes' commitment to treating their trade partners as true partners rather than mere vendors is another key to their success.

One of our core values is that everyone wins fairly. We understand long-term success relies on a 360-degree win for everybody," says Gibson.

This philosophy ensures that all parties involved in a project are motivated and aligned toward the same goal—delivering quality homes efficiently, even in a tough market.

While McGuinn Homes has carved out a strong position in the BTR market, both Wade McGuinn and Nate Gibson acknowledge the significant risks and challenges that come with operating in today's economic regime. The era of higher-for-longer interest rates, high input costs for materials, and the lingering effects of recent inflation create a complex and often unpredictable environment for developers and builders alike.

Wade McGuinn candidly discusses the pressures that come with this environment:

We didn't pencil a deal at all in 2023, but in 2019, 2020, and 2021, 100% of our sales were BTR. The difference is that now, pro formas may not fully account for the higher borrowing costs and inflationary pressures that are still very much in play. Developers and investors need to be realistic about the financial landscape."

McGuinn's Gibson adds that the margin for error is slimmer than ever, making it crucial for all parties to approach projects with a clear-eyed view of the costs involved.

People are gun-shy right now. The operators are afraid to commit, and the investors are cautious because they don't know what the future holds, particularly in terms of the cost of capital. We’ve had to get creative in how we make these deals work, often revisiting and revising product types to ensure they still meet financial expectations."

Gibson also highlights the importance of maintaining strong, trusted relationships with local officials, construction partners, and other stakeholders in mitigating these risks.

Having those relationships in place means we can work through challenges more efficiently and find solutions that might not be apparent to those without deep local ties."

For McGuinn Homes, the key to success in this environment lies in flexibility, creativity, and an unwavering commitment to partnership.

We're not beholden to strict margin targets like public companies, which allows us to adapt and find ways to make deals work even in tough conditions," says Gibson. "But it requires a realistic understanding of the market and a willingness to adjust expectations and strategies accordingly."