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 this first of a two-part interview, Wolfson reveals development strategies that have proven effective for his company, and also touches on why BTR properties are more insulated from potential challenges brought on by the slowing economy.
READ ALSO: Read Part 2 With Woldson Development
Your company has been active in the BTR sector, especially in Florida, for a few years now. What factors have contributed to the growth of the sector throughout these years?
Wolfson: We’ve been active in the BTR space for about six years now and well before the term BFR was invented. The earliest participants were really in 2017 and that’s when we got into the space.
There are a lot of factors that have been driving this segment. I think the chief among them is that you have a growing number of the American population that cannot afford a down payment and a monthly payment to own a home. Yet, they are still forming households and they still have the need for more space. They sort of age out of traditional apartments and garden-style multifamily when they need to get that third bedroom, a dog or a child joins their family or they have a work-from-home situation. For whatever reason, they need more space. Economically, they may not be able to afford the down payment or the monthly payment for a mortgage. That pushes them into looking for what would traditionally be a home that they would purchase. But in this case, it’s for rent.
We are 6.5 million homes short in the U.S. If you’re six and a half million homes short and the homebuilders are refusing to keep up with that pace because they want to keep prices high, there’s a tremendous gap between the need and the supply of housing, whether for rent or for sale. If you break that down further, the amount of people that can buy within the segment is dwindling. It’s getting smaller. That’s been the primary driver: this undersupply of housing and the inability to afford the mortgage.
Considering the current economic landscape and increasing market volatility, what challenges do you see on the horizon for the sector, particularly in the Sunshine State?
Wolfson: The Sunshine State is going to do better than the rest of the states because we have a rising tide. And a rising tide, they say, lifts all boats. That’s fueled by tremendous population growth, first in the nation. For the first time ever, Florida has more jobs than the state of New York. Whatever happens, broadly speaking, in the greater economy, Florida is going to be sheltered to many extents over other states.
Now, the challenges that we see on the horizon, I don’t think are unique to multifamily or to BTR as a sector. There are liquidity issues and expensive debt. It’s very difficult to get construction financing, which further exacerbates the supply problem. It should drive rents up. Beyond that, you have an increase in the costs of debt, so it’s very hard to make your deals pencil in if you’re buying at low cap rates like we used to.
There’s going to be a reset in valuation that’s driven by the ultimate levered returns that someone’s going to get, and that’s driven by debt. We’re going to see a slowdown in new starts for multifamily and built-for-rent. We’re going to see a reset in values for both those asset classes, largely across all asset classes. I have made the argument before: BTR is probably the most insulated of all major groups in real estate.
READ ALSO: Berkadia’s Cautiously Optimistic Outlook for the BTR Sector
Why do you believe that it is an insulated group?
Wolfson: There’s more of a fundamental undersupply of housing. It doesn’t matter what the economy is right now—we’re six and a half million homes short of what we need. Sure, in a recession, people form households a little bit less and slower, but they’re still forming. In that same recession, you have the builders who are not building houses because they can’t sell them right now because mortgage rates are too high.
That six and a half million homes, it wouldn’t surprise me if it was 7 million homes by the time we’re out of this recession. If you’re in that sector and you have this tremendous growing need for housing and less housing available as you progress, you’re going to wind up having a demand-driven issue. If you look at it from that standpoint, what you realize is that if you’re not building new houses and there is this difference in supply versus demand, the rents should continue to go up as the interest rates go up as you take people out of the house-buying market and you’re not adding new supply on the rental market at all because you can’t get construction financing.
Here’s another statistic: 47 percent of people that were in the market for a house last year are now out of the market. That doesn’t mean that they are not expanding their families, it means they can’t afford to buy a home. Only 16 percent of the population thought it was a good time to buy a home last year. What that translates to is not lower household formation, just lower availability of the rental product that people are going to need. Because of that you’re sort of insulated from the greater demand issue or the greater economic landscape right now in many ways.
You mentioned that households formation patterns and the need for more space are some of the reasons why BTR properties are in such high demand. Besides these, are there any other reasons these properties are so attractive for both Florida renters and investors?
Wolfson: You have had a secular shift for the past 10 years that will continue. It doesn’t matter if it’s up or down markets, people are less able to own because there’s a secular shift away from ownership and the savings rates are dwindling over time. Cyclically, we’re on both sides of whatever happens, because as interest rates go up, people can’t buy more and then they’re forced to rent, which means rent should go up.
But if interest rates turn the other way and when they turn the other way—because they always do—the value of the property gets more. Even if the rents stop growing and people start buying other homes because now they can afford to because the rates are lower, our values go up. Of all the asset classes, we are uniquely hedged on both sides of the housing trade.
How have you adapted your development strategy to meet the growing demand for BTR properties in the Southeast?
Wolfson: Well, one of the things that we did early on is raised our own fund because it’s very difficult to buy land with an institutional equity partner. They typically like to buy when things are ready to build. We realized two years ago that if we were going to get ahead of everybody else, we needed the best sites. And to get the best sites, we needed to buy the land without loans, debt, equity, and without anybody to answer to. So, there was no gun to our heads when we had to get a project out of the ground. We knew very early on that we needed to be in control of our own destiny with the land. That was the biggest strategic thing that we did. We raised our own internal discretionary private equity fund and we bought a lot of land with it. We have no debt on any of our properties because of that.
The second thing we’re doing now—which is allowing us to adapt—is we’re doing things without construction financing. We’re doing things on the balance sheet. Because of that, we are less susceptible in many ways to what a construction lender might require. That’s done through a variety of partnerships.
This is primarily how we are adapting to this market cycle so that when everybody else can’t buy land, we are buying it. Now that we have the land when everybody else is unable to build, we’re building. Our idea is this product will be in demand and whoever can figure out a way to get the product on the ground by early next year is going to wind up way ahead of the game.
Check back next week for the second part of our interview with Adam Wolfson!
