Why build for rent -and not for sale?

Apartments over service retail, food and drink. ( a better amenity than a pool nobody uses) The Cotton District, Starkville, MS
Apartments over service retail, food and drink. ( a better amenity than a pool nobody uses) The Cotton District, Starkville, MS

Reading Chris Nelson’s book Reshaping Metropolitan America.  Today the US has 31MM Single person households and 82MM households without kids.  In 2030 these numbers are projected to be 45MM and 105MM respectively.  Nelson describes the epic miss-match between the configuration, location and tenure of the existing US housing stock and the current demand.  He lays out good arguments for why he thinks 75% of new housing delivered between now and 2030 need to be rental.

Take the low side of his numbers for the annual production of housing units for 2015-2020 at 1MM to 1.8MM units, at say, a million units.  Seventy Five percent of that is demand for 750,000 rental units a year, with well over half of those households looking to live in walkable urbanism.

In addition to the huge unmet market demand for rental apartments consider that most of the folks delivering rental unit to that market understand how to build unfortunate garden apartment complexes, mid-ride podium buildings, or TYPE I towers.  They are not going to be able to build scattered site 2 and 3 story walk up buildings or modest mixed use, or single story workspace in an urban context.  This is why I am so emphatic about not wasting the time of people who understand urbanism on building detached houses for sale and condos for sale.
With the huge market demand Nelson and others are describing, we can rent as many apartments as we can build over the next 15 years, so I think that sorting out how to deliver those apartments in building types and neighborhood patterns that reinforce walkable urbanism is the challenge for the next 5-10 years.
As the national homeownership rate shifts down from the pre-crash high of 70%, there will still be lots of opportunities for people to buy a house if they want to, but there will be less and less good reasons for them to do so.

 

For sale housing requires a serious enterprise to deliver something like a 10-12% margin. You need to close 30-40 houses a year minimum to justify the overhead needed to control your costs, make sure your quality is right, deliver houses on time, and take care of any warranty issues. It is hard to keep outside realtors in line and have a full time superintendent on less than 30 closes a year. Also, you are at the mercy of the local appraisers who may not have a clue what a well located, well-built house in an urban neighborhood is worth, and if the appraiser says the house is worth less than you want to sell it for the buyer has to come up with a larger down payment, and you could lose the sale. If you are well organized enough to sell houses to buyers with crazy expectations, you could be building apartments and mixed use buildings with more flexible delivery deadlines and get a much better return on the brain damage of running a building enterprise.

5 thoughts on “Why build for rent -and not for sale?

  1. Jesse Bailey March 12, 2015 / 12:08 pm

    Interesting numbers John. Definitely need to read that Chris Nelson book.

    I agree with the overall outlook, but I’ll add a counterpoint. My friend (a GC) just joined a custom builder/developer who does single family detached house product in a desirable submarket where prices are $800K and up. This developer has been doing so well delivering custom renovations and new construction on a cost-plus basis, he only does I would guess 15-20 jobs per year. These houses have a ‘green’ angle, some are LEED certified, and serve a certain prestige niche.

    These houses are located in areas with moderate walkability – older pre WWII suburbs with walkscores I would guess in the 70s to 80s. Walkability is a factor, but I would say its a minor point, to the sales of these homes. More important is the “I’m greener than you” (as much of a chimera as that is) market positioning of them.

    Not rebutting your thesis, just adding another angle.

  2. Jesse Bailey March 12, 2015 / 2:27 pm

    Loving the new blog John.

    I have to read that Chris Nelson book. I would agree with your conclusions, but wanted to add an anecdote.

    A friend (a GC) recently went to work for a custom homebuilder in a hot submarket in Florida. They are doing single family detached houses, ground up and complete renovations, in a high-end niche. They cater to a subset of the market that wants to look “Greener than their neighbor” and many of the houses are LEED certified. They are doing low volume on a cost-plus basis. Profitable business model. So it is possible to do a higher margin, lower volume enterprise, but it’s for a very wealthy clientele that will pay what it takes to get these features. More ‘status seeking’ just with a ‘green’ facade.

    The neighborhoods being built in pre WWII suburbs with pretty good bones and respectable walk scores I’d guess in the 70s.But I don’t think the walkability plays but a minor role in the marketing of these houses – it’s more the facade of being ‘greener than thou.’ (even if it’s not true in fact).

    Could green building/zoning be the next form of exclusionary zoning? Ie, if you don’t build to LEED (expensive) standard, your project isn’t welcome here? I don’t know but it’s an interesting thought. I’ve been reading Ben Ross’ excellent book ‘Dead End’ all about the status-seeking of suburban land tenure.

  3. Jesse Bailey March 12, 2015 / 2:28 pm

    Didn’t mean to post twice — I didn’t think my first comment went through.

  4. rjohnanderson March 13, 2015 / 1:56 am

    People who want to one-up their neighbor are going to be very challenging clients. Building or renovating custom homes involves a lot of moving parts that need to fly in close formation. If your interest stops with the individual building, I suppose it’s a way to make a living and keep some trades busy. I think the opportunity cost is way too high to be in that line of work, particularly if you are interested in urbanism and helping to bring up the whole neighborhood or corridor. If you have the skills and motivation to build custom houses for demanding clients, you could be building your own portfolio of urban workspaces, apartment buildings, and mixed use buildings. The custom house effort on a good day produces revenue , a satisfied client and a built piece of work -but no passive income. Custom work has bad days too. Days when you miss the delivery date, when you can’t get the plumber back to the site to finish the last bit of warranty work, when you have to chase the client to release a payment so that you can pay your trades, when the client sues you for sport because having the house renovated and expanded did not prevent their divorce…. As for Green Building, I figure that if you build well and your client is serious enough about understanding the green aspects of what you do, they are satisfied with a good explanation from a careful builder. If they want third party certifications and a plaque? That’s a good indication that they could be a high maintenance client. Make sure you refer those folks to your competition.

  5. Jesse Bailey March 13, 2015 / 10:57 pm

    Thanks for the reply John, as usual, great stuff to think about.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s