In this executive conversation, Steven Katz, Executive Vice President and Chief Investment Officer of Residential Financing at Arbor Realty Trust, shares his thoughts on the burgeoning build-to-rent (BTR) market. Katz discusses the contributing factors leading to higher occupancy rates in BTR properties, the advantages of BTR financing solutions for investors, and their long-term growth potential. He also offers valuable insights into the appeal of BTR communities and emerging markets to watch closely.
HousingWire: In the current economic environment, what factors are driving the higher occupancy rates of SFR/BTR properties compared to traditional multifamily housing, and how do these factors position the SFR/BTR market for sustained growth?
Steven Katz: A lot of the renters are renters by choice, not renters by necessity. The credit profile of the tenant in the BTR space is much stronger. With this asset class, you are talking about an average household median income of $120,000 or more. Many tenants living in BTR communities may also own a BTR investment property while renting a BTR property themselves. Consider a city like Dallas with suburbs in its outer rings. Some people couldn’t necessarily afford to own in a sought-after school district, but they could afford to rent in that district and will rent a home to send their children to school there. That’s just one example of how BTR offers access to a lifestyle that renters could not afford otherwise.
HW: Can you elaborate on the key aspects of BTR financing solutions that make them advantageous to investors today and how these solutions might evolve to address future market challenges?
SK: Construction lending is extremely complex, and in which banks have traditionally been the dominant players. When you step into construction risk, it’s essential to have a partner that understands the market. Our team does a great job at demonstrating how we understand construction risk because we provide financing for the entire lifecycle. Arbor can cover borrowers for 10 to 15 years through construction and permanent agency financing, but very few of our peers have that ability. We have also been a bridge lender for decades. Our ability to work with borrowers to optimize their cash positions from construction to bridge to permanent has earned us a quality reputation. Borrowers trust that Arbor will successfully execute for them and frequently return to us for their next project.
HW: With BTR properties generally being newer than much of the existing multifamily space, what opportunities does this create for investors regarding financial returns and long-term community impact?
SK: Historically, low tenant turnover is a huge opportunity for operators. BTR properties attract and retain quality tenants. Even though they are renting, BTR tenants view the properties from a homeownership perspective and maintain them with pride. The long-term prospect of rent growth within a BTR community is also very high, as many different demographic groups are now attracted to the renting lifestyle. On the one hand, you have amenity centers in these communities. But on the other hand, the home itself is an amenity. You have the garage, yard, and storage space that provides a lifestyle you can’t get in an apartment.
HW: As BTR communities attract lifestyle renters across multiple generations (Gen Z, millennials, boomers), what are the key elements of the BTR living experience that resonate most with the different age groups, and how can developers and investors capitalize on these preferences?
SK: Nationally, the housing supply is woefully inadequate. We are short millions of homes. BTR also provides a pathway for people who want to get to their first home. We will also start to see more 55+ BTR communities as many downsize into rental units that require less maintenance but still have ample space to entertain grandchildren. Communities with two-car garages offer opportunities for additional storage space for the tenant, which is not often available to multifamily tenants. We also see EV charging stations beginning to be installed in BTR communities as sustainability increasingly becomes a priority for many tenants, investors, and society.
HW: What is your outlook on rent growth potential for BTR properties, and which emerging markets should investors be watching closely for the highest growth opportunities over the next several quarters?
SK: While predicting the next several quarters is complicated due to the uncertainty over Federal Reserve interest rate cuts, BTR is largely insulated from macroeconomic headwinds. Arbor is very bullish on BTR in the long run and believes the sector will command premium rents as corporations expand to more metro areas. Returning to the Dallas example, absorption will keep moving out in several markets. Regions like the Southeast, Texas, and Arizona will remain steady. Another example is Nashville, where Nissan has a large plant, and Firestone is headquartered. In communities where large companies are building plants and headquarters, there will be a growing need for BTR housing in those markets.
