Jordan and Taryn Bennett took advantage of low mortgage rates during the pandemic to snag a condo in the Uptown neighborhood. But they need more space with a dog in residence and a child on the way. Interest rates, rather than helping them, are blocking them this time around.
The young couple, both 30, are turning to a newer type of housing product known as “build-to-rent,” or BTR, for some flexibility They zeroed in on an infill townhome community called Dominic Row in Denver’s popular Highlands neighborhood, before deciding to move into a rental home near Sloans Lake.
“People like us don’t want to go back into apartments. We are looking for that move-up, quality product with size and space and some amenities,” said Jordan Bennett.
Dominic Row, a new townhome development on a site that was previously an abandoned medical building, has been redeveloped into 18 new townhomes that are roughly 1,500 square feet in Denver, on Thursday, March 21, 2024. (Photo by Hyoung Chang/The Denver Post)
More people who once might have naturally progressed from an apartment to owning a condo or home can’t afford to make the transition given high property prices and high mortgage rates. Households unable to buy may prefer to live in a community under professional management with other renters, which build-to-rent offers them.
Dominic Row, which cost $12 million, is a build-to-rent project of 18 townhomes on the site of an abandoned medical building at West 29th Avenue and Hazel Court, just off Federal Boulevard near St. Dominic Catholic Church, said Jason Lewis, the developer behind the project.
Lewis, who has bought old homes as rentals and has done fix-and-flips, said build-to-rent offers developers another investment option. Building from scratch reduces the maintenance woes that come with older rental homes. Bunching rental homes together in a community allows for professional management and shared services like snow removal, landscaping and combined utilities.
Renting offers a more attractive economic proposition than owning right now. But if the market shifts the other way, the properties could be sold and the capital put to other uses, he said.
“Forever” renters looking for more space and privacy than what can be found with apartments are a core market for build-to-rent. Given its location, Dominic Row has proven popular with homeowners relocating from out-of-state who need a landing place, Lewis said. Build-to-rent communities also appeal to seniors who want someone else to handle the yardwork and maintenance but aren’t ready to sacrifice the space they had owning a home.
Large-scale build-to-rent communities first popped up in Phoenix about a decade ago and have quickly spread to several other metro areas. A record 27,500 BTR homes were constructed last year, which is 75% more than in 2022, according to counts from RentCafe.
Phoenix leads the nation with 9,345 BTR homes delivered over the past five years. Other top markets include Dallas, Atlanta, Houston, Detroit and Charlotte, N.C. Metro Denver ranks 12th overall with 1,112 BTR homes added over the last five years and more than 2,000 total.
“This is a different format that hasn’t been supplied en masse. I would expect it to be well received. You don’t have the same potential of oversupply as with other housing types,” said John Markovich, chief credit officer at FirstBank, which has financed BTR projects in Arizona and Colorado, including Dominic Row.
FirstBank can provide construction-only loans that roll into a mortgage with a different lender once a project is built or a combined construction and permanent loan with a single closing. Markovich notes the developments are trying to fill the gap created as more renters get priced out of ownership.
Looking only at communities with 50 or more units, RentCafe counts nine projects with 1,618 homes under construction along the northern Front Range. Another 11 communities with 2,247 homes are in the planning stages.
Among the larger BTR projects are the Fillmore at Copperleaf in Aurora with 229 units, set to open in November 2025, and Vella Terra in Loveland with 240 units, set to open in April 2025.
Planned projects are even larger. Brookfield Properties’ 39th Avenue in Denver is looking at 492 homes south of Denver International Airport. EX5 Management is looking at 630 units at its Spring Hill development in Erie on County Road 3 and Colorado 52.
“The cost to buy a home is exceedingly getting higher and higher,” said Doug Ressler, manager of business intelligence with YardiMatrix, which provides the data RentCafe uses in its reports.
The lack of entry-level housing products goes beyond apartments. Condos, the for-sale version of apartments, face elevated construction insurance costs because of fears around construction defects. They aren’t being built in large numbers anymore in Colorado. Although builders have packed homes in more tightly and reduced square footage, the market has struggled to provide first-time buyers with an affordable product.
Of the U.S. households that rent a place, about 28 million live in apartments and 14 million live in single-family homes, according to an analysis from Apartment List. Single-family renters are more likely to be families with children earning a slightly higher income. On average they only pay $160 more a month in rent to get more space.
About 16.6% of all single-family homes nationally are rentals, and metro Denver is close to that average. But in some more expensive housing markets like coastal California, the share of homes that are rentals runs closer to one-third to half. And in Phoenix, the birthplace of build-to-rent, they are closer to a quarter. About one in 11 new single-family starts are for a dedicated rental nationally.
Build-to-rent communities can offer renters something similar in size to an entry-level home — around 1,400 square feet with three bedrooms, a yard, and a driveway — at a lower monthly payment than purchasing, Ressler said.
The kitchen space of a new Dominic Row townhome is seen in Denver on Thursday, March 21, 2024. (Photo by Hyoung Chang/The Denver Post)
Bennett’s situation exemplifies how the math works in renting versus owning. A mid-point or median home in the Highlands neighborhood costs $885,000, according to real estate brokerage firm Redfin. With a 20% downpayment, which would require $177,000, the monthly payment would be around $4,700 before property taxes and insurance and closer to $5,400 including those.
Had the couple decided to rent in Dominic Row, they were looking at closer to $3,200 a month in rent. While that costs more than the average apartment rent in metro Denver of $1,875 a month, they would have obtained a larger space to wait for rates to fall.
The couple seriously considered “stretching” to make a purchase, but it wasn’t even close to feasible, Jordan Bennett said.
Because of the increased stress more households face in purchasing, builders of new home communities are increasingly welcoming built-to-rent projects rather than seeing them as competition, Ressler said. They provide a way to bring in households across different income brackets. The faster a community can grow, the sooner amenities such as grocery stores, restaurants and service providers can come in. And that improves its appeal.
Build-to-rent homes also offer builders a way to keep their crews and contractors busy when the for-sale market slows, reducing some of the cyclicality associated with home construction.
An uncertain future
Supporters of build-to-rent argue the communities offer households priced out of the purchase market an alternative.
Detractors argue that institutional money helped drive up home prices by purchasing so many single-family homes after the housing crash. Now investors are soaking up resources for new for-sale home construction. Given lower land costs and greater availability, most large build-to-rent communities are locating on the periphery, raising worries about sprawl.
And while it has seen a surge of interest, the economic fundamentals of build-to-rent have become much more challenging.
“There are headwinds given the interest rate environment,” Markovich acknowledged. “A lot of the projects that have been conceived have been tabled or postponed.”
Developers are tweaking their strategies or returning to the table with an entirely different game plan, he said.
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Lewis, who estimates some of his projects have seen their holding costs double from pre-COVID levels, is in that camp of developers struggling to make the math work.
“The overall cost as of now has made build-to-rent prohibitive,” he said, adding that he likely couldn’t replicate Dominic Row in today’s environment.
Land costs have gone up, as have material and labor costs. Interest rates are way higher, and so are property taxes and insurance costs. Projects take much longer to win approval adding a year or two of expensive dead time. A project Lewis has in the works in Arvada is in jeopardy after the city doubled its water and sewer tap fees from $25,000 to $54,000.
At the same time, rent increases have gone flat in metro Denver, reflecting a large supply of new apartments hitting the market and slower migration from other states. Higher development costs can’t pass through via higher rents as easily as in the past.
Lewis and his investors have three build-to-rent projects entitled and approved. He doesn’t know if they can move forward unless conditions improve.
“We are on the fence if we will hold those, build them or sell the lots,” he said.
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