American Homes 4 Rent struggles with a crowded build-to-rent market

Numerous demographic tailwinds have made build-to-rent (BTR) properties an increasingly attractive niche investment in multifamily housing. While still relatively new, build-to-rent homes combine single-family living with the convenience of a rental property and fill the gap to meet a growing market need.

The biggest demand is coming from millennials. This generation started renting more than 15 years ago and is now in their prime “nesting years,” meaning they need housing that can accommodate a growing family. With many millennials lacking a viable path to homeownership, BTR homes have filled a glaring need. Baby boomers downsizing their housing situations is also driving demand for build-to-rent communities.

Build-to-rent homes make up just one percent of the multifamily market today, but if recent demand trends hold steady, BTR may soon cease to be considered a niche multifamily product. The asset class is quickly becoming institutionalized, with major investors like Blackstone and Invitation Homes driving outsized buyer interest.

Blackstone recently bought Tricon Residential, a Canadian developer with 38,000 BTR homes in the U.S., for $3.5 billion. Invitation Homes is the largest landlord of single-family homes in America and has announced plans to expand its portfolio of 80,000 units with $1 billion in acquisitions this year.

Another major player in this space is American Homes 4 Rent, which does business as AMH. The real estate investment trust is based in Las Vegas and has a portfolio of 59,343 wholly owned single-family homes for rent. The majority of AMH’s portfolio is concentrated in the Sunbelt in cities such as Atlanta, Dallas-Fort Worth and Charlotte, North Carolina. AMH was founded in 2012 by Wayne Hughes, the founder of Public Storage.

AMH was one of several companies that emerged after the financial crisis and housing market collapse in 2008. Like Invitation Homes and Blackstone, AMH bought foreclosed homes and rented them out. This practice has proved controversial and a godsend for some politicians, but it has proven to be a powerful investment strategy. This “dispersed home buying” strategy was also used by institutional investors like AMH during the pandemic housing boom, but fizzled out when interest rates soared in mid-2022.

Since then, AMH has shifted its acquisition strategy from buying individual homes to building entire communities that are then rented rather than sold. The company has built a dedicated homebuilding division and is the 39th largest homebuilder in America, according to the most recent Builder 100 rankings. Of AMH’s portfolio of more than 59,000 single-family rental homes, approximately 10,000 were built by its homebuilding operation. In addition, AMH has approximately 10,000 rental homes in the development pipeline.

The company builds three, four and five bedroom homes. The most popular are four bedroom homes, ranging in size from 160 to 190 square metres. Operating your own home building division offers several advantages over working with and buying from traditional home builders.

This ensures that the homes meet quality and design standards, making them more attractive to the tenants they are trying to attract. The build-to-rent process allows AMH to scale its operations more efficiently. And finally, developing new residential areas through its housing division allows the company to strategically select sites and develop properties that are expected to have the best long-term prospects.

Since 2022, custom homebuilding has been a driving force behind the company’s portfolio growth. In the first quarter of 2022, AMH acquired 931 homes, 325 of which were from its custom homebuilding division. In the first quarter of last year, 299 of the 312 homes the company acquired came from its custom homebuilding division, accounting for 96 percent of acquisitions. In the first quarter of this year, 96 percent of acquisitions again came from custom homebuilding.

American Homes 4 Rent’s strategy for building homes is one of the reasons for its strong performance in the second quarter of this year. AMH reported an 8.5 percent increase in operating funds per share year over year and raised its full-year operating FFO per share guidance by $0.03 to $1.76. Demand for single-family rental homes is high, fueled by America’s acute housing shortage and rising home prices. AMH is capitalizing on this demand by increasing its housing inventory through its development program.

Given the shortage of resale properties, AMH’s homebuilding strategy makes sense. According to data from realtor.com, there are currently about 734,000 active resale properties in the U.S., less than 50 percent of the long-term average of 1.8 million. Recognizing this ongoing supply shortage, American Homes 4 Rent began its homebuilding strategy to complement its traditional MLS acquisitions and purchases from other builders.

The biggest risk to AMH is a nationwide decline in home prices, which would negatively impact the value of its portfolio. Single-family home prices have remained stable despite higher interest rates, bucking conventional economic wisdom. With unemployment still low and many homeowners locked into low-interest mortgages, there is no incentive for price discovery in the housing markets. This could change if a recession hits and more people lose their jobs. And if unemployment rises, more people may be unable to afford AMH’s rents.

Currently, American Homes 4 Rent is poised for growth as the build-to-rent market continues to grow. AMH was an early entrant into the BTR market, but many large apartment developers are now entering the crowded field. Greystar, the largest apartment manager in the country, has launched entirely new brands, such as its portfolio of Summerwell communities that specialize in build-to-rent. Even homebuilders like Lennar and DR Horton are establishing BTR divisions. The proven financial benefit of the product and high demand are driving interest from many in the real estate market.

The demographic tailwinds underlying the build-to-rent investment thesis are clear. Millennials who cannot afford to own a home are a driving factor behind BTR demand, and this is not likely to slow down anytime soon. While capital markets remain challenging, American Homes 4 Rent and other companies in the build-to-rent space are on an excellent growth trajectory.

AMH’s homebuilding strategy will drive growth, but its niche multifamily real estate is also attracting some of the largest U.S. real estate investors. AMH will soon face much tougher competition than usual, testing whether the company can maintain its dominance in a fast-growing subsector.