Who Needs Who More? Do BTR Buyers Have The 'Say' On Prices?

In a nail-biting new residential real estate landscape that's yet to fully come to grips with near- to medium-term supply and demand challenges, bidding and asking – the very essence of what transacts – has gone haywire.

Last week, we wondered ...

Will build-to-rent – specifically its capital investment channel and development pipeline – work out as the 2023 safety-valve homebuilders have in mind?

The question came up in the "if it looks too good to be true, it is" spirit.

The inference in the story – and the narrative that spurred the story – was that BTR investors and developers might score on highly favorable vertical construction costs for newly built-to-rent products, given that a glut of homebuilders might look at them as a channel of last resort to clear inventory and re-spark sales pace.

Soaring borrowing costs, softening rent trends, and a good-'ol wall of worry over the general economy have together seized up a lion's share of new investment capital, leaving a narrowed stream for the best and most experienced players in the BTR space. Only deals with far lower upfront development and input construction costs, or – alternatively – higher-end renters can pencil these days.

What's more, deal vintages modeled and funded at the end of 2021 and early 2022 and later decoupled from their business plans as mortgage rates stepped up, prices remained elevated, construction completion time delays stalled community openings, and rent demand has fallen.

They're in pro forma purgatory, and some of them carry enough exposure to motivate them toward stop-loss cut-and-run positions – an opening for opportunists.

Indeed, as blue-sky land deals fall by the wayside, vultures have begun to circle over tracts that show signs they'll never make it as the build-to-rent communities they were presented as in their investment pitch-decks.

One hard-charging, entrepreneurial, multi-regional homebuilding company strategist tells us how the dynamic looks through his lens. Here's his note from the front-lines on the matter, a complication in land valuations hanging over the 2023 and 2024, and even the 2025 horizon. He says:

As many single-family rental [investor-developer] groups were jockeying for rental homes over the past five years or so, we homebuilders wouldn’t have much to do with them. Sure, a few big deals went down and entire communities were sold to these guys. However, that happened relatively not often.

They would call and pretend to have 6-gazillion dollars. After the first four or five we talked to went nowhere, we absolutely stopped taking their calls. There were so many of them, but the majority of them were 'all talk,' but no action.

Three years ago, I would absolutely not talk to these BTR guys and encouraged my regional presidents not to waste their time either. It was a cul de sac. Apparently a lot of my comrades felt the same.

So what did the legitimate investors do? They opened up their own lot/land acquisition and development companies! They determined that if they wanted to deploy that money, then they were going to have to start with the dirt themselves.

Now, many of them had heard talk that it takes a year or two to develop – not knowing that – for those who don’t know what they’re doing -- it actually takes two or three …. even four years to develop!

Well, the decisions they made to do that back in 2019 and 2020 are what we now call “pregnant”…. And there is no simple walk-away from these deals.

So, while it’s true that new deals aren’t underwriting, the real problem is that from earlier there were all these half-baked ones – and there are tons of them among the earlier vintages -- to contend with.

And guess what… THEY no longer underwrite!

Sadly, some of these groups are now calling us and saying 'Hey! You want to buy some lots?'

Of course they’re probably 'in' these lots more than they should be. That's because they were anxious to deploy that capital, and figured since they were going to be the end-user they could probably pay a little more for the dirt (you remember those days).

They underwrote that dirt assuming a cap rate take-out and now they’re wanting to get out and looking to builders to buy those overpriced lots.

It has caused quite the 'ask-bid' spread as you may expect. Not sure if you’ve heard this from anyone else but I’m one that thinks this thing is going to drag on through the end of 2024 (or beyond) which causes a bit of a looming issue."

It's part of every down cycle, where opportunists score on sweetheart land deals that can time-release into explosive growth when a next rebound occurs.

Timing is of the essence. When residential real estate markets are spiralling upward, everyone reacts. When they start heading down, a few, smart, well-prepared players will respond.

Knowing when is often a learned skill, not often sheer instinct. The ones who know "when" aren't letting on they know, and the ones that don't know "when" aren't aware of it.