Builders are targeting the growing build-to-rent market

The homebuilding sector has underperformed in recent years, but one segment, the “build-to-rent” market in which homes are built explicitly to be rented out, has managed to pull off some stunning growth

CNBC reported that 37,000 homes were built as rentals in 2017, rising to 43,000 last year, which accounts for just under 5% of all single-family housing starts. But experts say that figure is likely to be lower than the true number of homes built to be rentals, as it reflects only those that are rented out by the builders directly, not those sold to investors which are also bought with the intention of becoming rental properties.

“There is a consumer rental demand that is driving these institutions to want much greater levels of inventory of this product,” Gerald Ellenburg, CEO of ERC Homebuilders, told CNBC. “They are learning or have learned that new inventory is a much safer and more official rental product.”

Several of the biggest homebuilders in the U.S. are entering the built-to-rent market. Toll Brothers, for example, recently announced a $60 million investment with BB Living, which is a built-to-rent company based in Phoenix. And Lennar, the largest building firm in the U.S. by revenue, said this week it will also be expanding further into the sector following a successful pilot in Sparks, Nevada.

“This is the first in what we believe will be an ongoing business strategy and relationship where we build and sell homes in bulk on land owned by third parties with no lease-up risk,” Lennar President Rick Beckwitt said on a recent earnings call.

Toll Brothers’ CEO Douglas Yearley weighed in too, saying the build-to-rent market is viewed as “an ancillary income stream” during his company’s earnings call last month.

“We see this as more and more renters may prefer to raise a family or live in a single-family versus an apartment complex or community or building,” Yearley added.

ERC Homebuilders, a Florida-based single-family residential developer, intends to launch two Regulation A+ offerings to the public, the first of which may launch in the coming weeks (subject to SEC qualification), to try to raise $50 million each to build more than 1,000 rental homes across Florida. The homes will be built beside one another and sold in bulk to large-scale investors to manage.