The Build for Rent Opportunity

Offsite construction is a perfect fit for this market, and there’s plenty of room to grow

• Approximately 100,000 new build-for-rent homes will be completed in 2022. However, that won’t be enough to meet demand.
• It has become difficult to build affordable 1,500-square foot homes on-site, but a community of factory-built homes can be completed for an all-in price that yields better cash flow for investors.
• Modular and panelized construction’s speed to completion also gets units rented more quickly. This is very attractive to investors.
• Factory efficiencies are enhanced by the fact that a build-for-rent community tends to have little to no variations between units. Although this can be an advantage for manufacturers, some are reluctant to tie their production up with a big project.

In 2019, J. Don Overton, Principal of Sustainable Construction (a residential contractor in Little Rock, Arkansas) assumed construction of a 330-unit,w build-for-rent (BFR), site-built community on 60 acres. It would be the first-ever single-family rental project in the state of Arkansas. “Then the pandemic happened. We were already seeing supply issues in lumber, cabinets, granite, and doors in May and June 2020. We decided we needed to do something in case it got worse. We started exploring modular,” says Overton, who is also an attorney and developer.

A member of the National Association of Homebuilders (NAHB) for a decade, Overton joined that organization’s Building Systems Council and “immersed” himself in all things related to offsite construction, talking with offsite builders and visiting factories around the Southeast. Overton learned about the benefits of offsite construction — production speed, the need for less labor, a more predictable schedule, and a consistent product. He chose to forge on.

But for many builders, making the change to modular is not in the cards. BFR makes up approximately 6% of new homes, while offsite sits at 3%. It would seem that those doing BFR housing — where speed is the easiest road to profitability — would embrace offsite construction. Why aren’t they?

It’s About Time

George Casey, President of Stockbridge Associates (a consultancy in the homebuilding and master-planned development sector) and Chair of the Housing Innovation Alliance (HIA), says, “The core difference between build-for-rent and build-for-sale is the accelerated importance of time.”

Overton’s Little Rock 330-unit BFR project (single-family, attached) took about two years; it was completed in fall 2021 and sold to a Real Estate Investment Trust (REIT), which manages the property. The modules were produced out of state because there is no local manufacturer in Arkansas. In some sense, Overton’s business model is like conventional retail home building, but he stresses that because the buyers are investors, they’re primarily “concerned with getting the houses completed as soon as possible.” Speed allows for a quicker return on investment.

“For every month you can build faster you not only get interest savings compared to build-for-sale, but you also get a month of net income off of each house,” Casey says. (A McKinsey & Co. report on modular construction found that “using 3-D volumetric modules can deliver 20% to 50% schedule compression.”)

With a factory product, there’s a “natural simplification of the process,” says Dennis Steigerwalt, President of the Housing Innovation Alliance. That’s because every unit is usually the same and doesn’t need to be customized. “When you do a BFR community, it’s just one decision for fits and finishes.” Again, this makes the process move more quickly.

Overton currently is developing several other BFR projects in Arkansas and Oklahoma, under a separate entity, Terra Verde, LLC. He is working with a company based in West Virginia to locate a factory in Arkansas to produce the modules needed for those projects and any future projects.

Completed units will include high-end finishes — granite counters, stainless steel appliances, LVT flooring, LED lighting and prefinished LP siding. Once the modular factory is up and running, Overton hopes to be able to have three to four completed houses delivered weekly to the jobsite for assembly and final finish. That’s a striking difference compared to site-built homes, which may take six months to a year to site build in the current market.

Other Advantages

While speed is important, it’s not the only advantage of modular. Because of factory production’s economies of scale, Overton says he gets “a more unified product at a lower price point because the waste factor goes away.”

He also sees, particularly with current supply chain issues, that “delays are not as impactful” as they might be with conventional building. “If windows are delayed by four weeks, I can get however many modules that factory could produce ready for everything except the windows — wiring, plumbing, insulation.” And, because the modules are being built inside a factory, bad weather won’t delay the construction as it does with a site-built home.

Using a factory-built product also has helped with Overton’s labor issues. “There’s a skilled labor shortage in Arkansas and my biggest labor pinch points are framing and drywall. Modular fixes both of those issues” because he needs fewer people for those tasks. 

The finished factory-built product is also of higher quality. “In traditional building, each framing crew does things differently,” Overton says. “You might not catch that they’ve done something wrong until the drywall phase. Then you have to spend money to fix it and the framers have already moved on.” By contrast, the factory setting lets you standardize how everything is built.

Some Road Bumps

With his first project in Little Rock, Overton had a learning curve with the municipality. “We had to get them all on the same page and get everyone to understand that the product meets building code and is as good as, or better, than a site-built home.”

He says the biggest negative he sees with trying to do modular is the amount of time often necessary to educate people related to the project. “Community members, inspectors, subtrades. Everyone fears the unknown or thinks modular homes are the same as [HUD-Code] ‘manufactured’ homes. They’re not.”

Fortunately, he gets little resistance from investors. “Once I can explain [modular] to them, they say they don’t care if the home is built on-site or off-site as long as they can rent it.”

One big consideration when exploring the use of offsite construction is accessibility to a manufacturer/factory. The closer to the site, the more quickly product gets delivered. (And, the lower the cost, particularly as gas and diesel prices surge upward.)  Overton is using site-built construction for a 220-unit Jonesboro, Ark., project because there is not a factory local to Arkansas. If his team is successful in getting the West Virginia group to build a factory in Arkansas, they’ll shift production from site built to off-site and use the new Arkansas facility.

There’s also risk involved when working with any manufacturer for a long-term project. “There are big issues around capacity. Very few factories want to put their eggs into one basket,” Steigerwalt says. “If you find a factory big enough to take on an order of 300 units over 18 months, would they want to do it? You might be 90% of their business and that can be a scary proposition.”

The other question traditional builders have when thinking about modular is whether their existing floor plans will work. That’s the worry that Jim Barbate, President of Pride Mark Homes in Victor, N.Y., has. A custom home builder, he began offering rental products in 2007. He has several BFR communities with a mix of townhomes, single-family detached and three-story apartment buildings in the Rochester, N.Y., market.

Barbate uses conventional on-site construction methods but incorporates factory-built panels. He knows that using more offsite construction products would be beneficial, citing the need for less on-site labor and faster time from production to move-in. He thinks about modular, but wonders whether his floor plans can transfer. “I’m not looking to shift all of my portfolio. I’ve developed homes and floor plans I like. To go modular, I would need to find a company that would take what we build and produce it for us,” he says, adding that he’s not quite ready to go down that road yet.

BFR Demand is Growing

On a recent Housing Innovation Alliance webinar, market consultant Brad Hunter, President of Hunter Housing Economics, spoke about $40 billion in capital earmarked for the [rest of 2022] for BFR. He predicts there will be 100,000 new BFR homes this year, but that won’t be enough to meet demand. (He predicts 130,000 will be built in 2024.)

Some big players in the single-family rental arena are seeing the value of using modular. Richard Rodriguez, Chief Operating Officer, construction and development and head of real estate operations at Amherst Residential, also participated in the HIA webinar.

Rodriguez said that Amherst is using modular in the infill platform. “There are opportunities in either HCV [Housing Choice Voucher], or in areas that have not yet gentrified, to buy very cheap land, lots really, raze the existing home and bring in a modular product that, on day one, is the nicest house on the block. It gets people over the stigma of bringing in a home on a truck — which we still have to deal with — and at the same time you have a ready resident and you’re part of gentrifying a community.” Amherst is doing this in the Tampa-St. Pete, Florida, market.  

As Overton puts it, “the future of entry-level housing is single-family rentals. You can’t build an affordable 1,500-square foot house on-site anymore, but I can build one in a factory at a price where the revenue from the rents justifies the expense.”