The year ahead could be a time for growth-minded developers to capitalize on a slight market slowdown while positioning their portfolios for future demand.
That’s according to Don Walker, managing principal of John Burns Research & Consulting, an expert in the single- and multi-family residential housing markets who also maintains the first and largest database of active build-to-rent communities.
Walker recently shared his market insight with Redwood leaders and investors and says multiple factors are creating long-term opportunities despite some short-term headwinds.
“It’s never been harder to buy a home, with mortgage rates up and up and up,” Walker said, noting rates are trending at their highest level since about 2000 and are driving a drop in affordability that hasn’t been this challenging for owners since he started tracking in the mid-1980s.
“People are spending 46 percent of their income to pay the monthly cost of home ownership, and the norm is 32 percent,” Walker said. “Those people that wanted to buy no longer can. They’re going to be renting longer, so that’s good for the rental industry.”
Rental housing, which encompasses everything from traditional apartments, mom-and-pop single- family homes, detached single-family home developments and the build-to-rent model embraced by Redwood, is experiencing its own market fluctuation.
“Coming out of the pandemic, people were leaving apartments in droves and moving into build-to-rent communities,” he said. “We got to around 97.5 percent occupancy coming out of the pandemic, and that’s started to go down, but communities have stopped pushing rent growth and we’ve stabilized around 96 percent.”
Rent growth in the year ahead for the sector is expected to be flat to slightly up, he said.
Land sales also are trending down, he continued.
“So individual builders are taking their foot off the gas,” Walker said. “For those who continue to move forward, you’re going to enter the market with a lot less competition than you otherwise would have.”
Interest in acquiring build-to-rent communities soared after 2020 once “institutional investors saw how well single-family rental and build-to-rents performed,” Walker added. “They said that’s where they want to be. That’s the safest risk-adjusted return they can get.”
Going forward, population demographics suggest continued need for multiple housing options.
“Long-term, we need 17 million new homes for our nation between 2020 and 2030,” Walker said.
That averages a need for 1.7 million new homes annually and given that many buyers are priced out of single-family or prefer the lifestyle offered by renting, it equals opportunity for the build-to-rent sector, he said.
“We have a lot of growth coming from those under 44 and those above 65,” Walker said. “These age groups are attracted to Redwood’s product. It’s people who are older and retired and don’t want to climb stairs or maintain a home, and it’s attractive to younger folks who don’t have children and want to live in a Redwood apartment rather than a traditional one. I think the statistics bode well for Redwood in the next five years.”
Walker has watched Redwood’s growth and calls it intentionally under-the-radar. “They don’t have a lot of competition in their markets, and I’ve been impressed by how they’ve grown.”
The nine states and multiple metro areas where Redwood has invested in its communities show either positive net in-migration or improving out-migration, Walker said.
Metros like Charlotte, Des Moines and Indianapolis are particularly attractive, he added. “These are steady migration markets, but we also have improving markets that are losing fewer people, so that’s all good news,” Walker said.
Walker’s firm also recently surveyed tenants, including those who live in Redwood Neighborhoods, about their experience and expectations.
“Redwood’s product is attractive to a lot of different cohorts,” he said. “Seventy-two percent of Redwood tenants said property management is an important reason for choosing their community, and 90 percent said home maintenance was an important reason. That’s an amazing number.”
Another key factor is pets.
“We see around the country how important pets are, and Redwood has one of the most generous pet policies I see, with up to three pets for $35 in a fixed fee,” Walker said. “What that does is help attract and retain tenants.”
In the year ahead, Walker anticipates some moderation in mortgage rates, at least flat job growth and growth in personal income due to the need for workers.
“We’ve gotten more bullish and think we’ll see solid growth again in 2026,” he said, adding even if the Federal Reserve executes a “soft landing” lowering interest rates, there will be a slower growth environment for a time.
“We think home sales are going to go up as rates come down and incomes continue to go up, and we think rents are going to stay positive and gradually increase,” he said. “Build-to-rent construction, in the long run, is going to grow again, and in the near term will come down quite a bit and help demand for the people who do build in the short term.”
Redwood anticipates a robust pipeline of development activity in 2024. To learn more about current and upcoming investment opportunities with Redwood, call 216.360.9441 or click here.
