Why build for rent -and not for sale?

March 8, 2015 rjohnanderson

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.