From Single-Family Residences to Apartments: Home Builders Enter the Rental Market

by 27 Jan 2013

The red-hot rental market in the United States shows no signs of slowing down, and now even home builders that traditionally develop single-family residences (SFR) are jumping in. A recent CNBC article quoted Stuart Miller, CEO of major American home builder Lennar, as he announced his company’s intention to build more than 6,500 multifamily units in the next few years.

Toll Brothers, another major SFR home builder, has already begun new construction on apartment complexes. Lennar and Toll Brothers are among a group of home builders that are seeing their bottom line chipped away by the rental market. According to recent data released by the U.S. Commerce Department, 30 percent of all residential construction during 2012 was dedicated to building new apartments. The growth rate in terms of new apartments was a staggering 166 percent from 2011 to 2012.

Greater Rental Construction Activity

Home builders have been enjoying a resurgence of SFR orders after years of inactivity, but even those orders are losing steam in comparison to the very active segment of apartment construction. According to CNBC news reports, SFR construction slowed down by 24 percent in the last quarter of 2012.

Multifamily construction came to a virtual standstill in 2004 due to the speculative aspect of the housing market at the time, as well as the free-for-all subprime mortgage lending environment. The Commerce Department estimated 200,000 new multifamily developments in 2012, a far cry from the 340,000 annual averages of the early 21st century. Current demand for rental properties clearly outweighs supply, which is a major reason for home builders to jump in the market.

A Move to Urban Centers

The current preference for rentals among American families is in accord with the exodus from the suburbs and the return to big cities. Americans are certainly driving less, and they are not as interested in home maintenance and improvement as they were before the housing crisis. Lennar’s answer to this trend has been to open offices in major regional rental markets such as Atlanta, Chicago, Miami, and Phoenix.

The meteoric rise in demand for rental units has been fueled by disillusionment in the aftermath of the collapse of the housing and mortgage markets in 2008. Many former homeowners who lost their properties to foreclosure after the housing bubble burst are no longer eligible to qualify for a mortgage in today’s tight lending environment. The same goes for short sellers and those who chose to walk away from their negative equity mortgages. Even mortgage applicants who simply lost their jobs in the downturn of the economy and were not able to pay their bills on time are facing steep difficulties getting a home loan; they are also turning to the rental market instead.



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