Even in times of economic uncertainty, the single-family rentals sector continues to show resilience, with asking rents hitting $2,079 in March, a 2.8 percent year-over-year increase, according to the latest Yardi Matrix multifamily report. At 95.5% in February, occupancy rates have also remained stable, the same source shows.
Multi-Housing News spoke with Adam Wolfson, CEO & CIO of Wolfson Development Co., a BTR owner and developer with more than $900 million projects in the pipeline, about investors’ optimism when it comes to the sector’s projected performance in the long term. In part two of this two-part interview, Wolfson revealed details about the company’s projects, top-performing markets, and emerging trends he’s seeing in the BTR sector.
READ ALSO: Zooming In On the BTR Sector’s Prospects—Part I
When evaluating potential BTR projects, how do you determine whether a development is a good fit for the company or not?
Wolfson: We want to be in a market where it’s a rising tide like Florida, like Texas, like the Carolinas, where people are moving to because you can be smart in any investment. As they always say, it’s better to be lucky than smart sometimes. If you’re playing in markets that are always rising, you have a chance to be lucky rather than when you’re playing in markets where you know the population is either staying at current levels or shrinking. That’s the first thing—we want to be in a place with a good solid population growth trend and reasons for people to move. We want to be in a place with solid employment.
When you look at the micro market, we want to be in a place that’s very close to transportation, that has well above-average schools, that has good retail options for people around it and is in major markets within those states that we like to be in. We’re not a fan of trying to identify right now trends and tertiary markets within Florida because we don’t think the institutional liquidity will be there on the backend, or if it is, it’s only going to be there for a brief window during a boom time. We want to be in places where you have to be.
When we’re looking at land, we need to pencil probably 100 basis points on our yields-on-cost higher than what other people were underwriting. That’s one of the reasons right now we’re not that worried about what’s happening in the broader market because we have a lot more cushion in our margins. Because we bought the land in good places with rising rents where we knew that if we got out of the ground, we’d be well ahead of the traditional or acceptable market rate caps.
READ ALSO: Tricon Residential’s CIO on the Sun Belt’s Ever-Growing SFR Market
What makes your largest projects unique in their respective markets, apart from size?
Wolfson: One of the things we do that other people don’t do in BTR is we believe that you need to ‘amenitize.’ You need full amenities: gym, pool and clubhouse. In many of our newer projects, we’re putting in pickleball and basketball courts. We’re trying to appeal to people that have children by giving them afterschool care in some of these buildings with tutoring so that when the parents are still working, the kids have a place to go before going home. Those are the things that we try to do from a sort of resident support and lifestyle standpoint.
The other component that makes these unique is that we’re in best-in-class locations. Every single one of our locations has a very good story to tell about why we’re there. There’s not one that we’re looking around saying ‘I’m not sure why we’re here.’ All these projects are top-notch locations with very good rents. And they are crown jewels in most of these markets. We’re up to about 2,000 units right now across Florida, in some great locations.
What is the profile of your prospective renters?
Wolfson: We want to make it attractive for people who were living in a garden-style apartment and are moving from a one-bedroom or a two-bedroom, getting a roommate, or a significant other and need more space. We want to make it a logical next step.
For this tenant, they are likely used to being in a community that has programming, a central clubhouse, a swimming pool a gym, all those things. It’s going to be harder for you to go to a neighborhood in a scattered single-family home for rent where there’s no sense of community, belonging or cohesiveness. We want this to feel like the logical next step for somebody that was in a garden-style multifamily community and needs more space. That’s a clear focus for us. We want continuity of experience for that person.
As far as who’s going to live there, there are so many different opportunities. You’ve got the people who have families and who need a backyard. You have people who have a dog and need their own backyard so they can let their dog out without having to put on their pajamas and walk down the hallway. For people who have cars that don’t want to walk across the garage, or across a parking lot, we have attached garages. Those are certainly easy pickups for us in terms of the target market. There is also a growing number of people that work from home and need a third bedroom usually to do that. Obviously, that’s an easy market for us, as well.
Finally, one of the things we have in Florida that other places don’t have is part-time seasonal residents—we call them snowbirds. They come down from Michigan or New York and they spend six months out of the year. They’re down here to maybe see their grandkids or to get some sunshine in the winter. Maybe they’re retirees, maybe they’re not, but they don’t want a full-time residence. They don’t want to have to take care of something. Those folks also, depending on which micro market, are a big component of our renters.
READ ALSO: 3 Ways to Market Single-Family Rentals
Do you have any expansion plans or any projects underway in other markets besides Florida?
Wolfson: Nothing that I can announce yet, but I can tell you that we have put out letters of intent on properties from Texas to Tennessee and everything south of there, in Alabama, in both Carolinas, Georgia and even Utah. Those are all markets that match that sort of rising tide thesis that we have…
One of the things we’re looking to do—like two years ago when we went out and bought land when nobody else could—is to form partnerships with the best-in-class operators in those markets so that we can expand our presence there without having to start one project at a time. If we can work with the best-in-class operators across these markets, that’s going to be a much faster entry point to get us into the markets we want and at scale.
Looking ahead, how do you expect the BTR sector to evolve? Are there any emerging trends in the space?
Wolfson: On the operations side, you’re going to get more technology, and more green-focused homes, with net zero emissions.
On the investment side, the biggest trend I see is consolidation. It does not matter what industry you’re in all these periods of economic uncertainty, there are those that have assets, but they can’t move forward with them. In these periods, those that dare to move forward, that continue to move forward and that have the capital, whether it’s myself or another group, they’re going to consolidate the industry, to buy into these other companies or buy sites from them. They’re going to find a way to do that.
Though the SFR industry is not exactly analogous, a good indicator is the trend or prediction in the SFR business that what was 3 to 5 percent institutional ownership pre-COVID-19, is going to wind up in the next seven years at 40 percent. That trend is going to happen in BTR, too. I think you’re going to wind up with consolidation among the smaller BTR builders or those that weren’t properly capitalized. They’re going to be partnering with or bought by the larger folks.
The last predictive trend I have is that when you’re talking about homes that are under $500,000 and anything under that threshold, I think it will not have a “retail value” in 10 years. I think 100 percent of all homes will be valued (if they’re under $500,000, give or take) at the prevailing cap rate based off the income that they provide.
Check out Part I of our interview with Adam Wolfson here.
