The Role of Purpose-Built For-Rent Communities in a Rising Rate Environment

Interest rates have been rising since mid-2022, and are likely to continue rising through 2023. It’s making the cost of real estate more expensive for prospective homeowners, and forcing many to re-think buying vs. renting. Nevertheless, there’s a continued need for housing to support Arizona residents, and it’s pushing purpose-built housing into the spotlight.

Purpose-built for-rent communities can provide stable, long-term rental options for individuals and families who might otherwise buy. These communities offer amenities and services not typically found in traditional rental properties. In simpler terms: they include many of the perks of ownership, without the cumbersome mortgage more and more people are shying away from in the current market. 

Here’s a closer look at the role of purpose-built for-rent communities as an alternative to homebuying, and why more people are drawn to this option in 2023.

What is purpose-built for-rent housing?

Purpose-built for-rent housing—also known as multifamily rental housing—refers to residential properties specifically designed, constructed and managed as rentals. These properties range from small apartment buildings to large communities with multiple buildings, single-family homes, amenities and services like on-site management, fitness centers, community spaces and swimming pools.

For-rent housing can be either privately owned or owned by a government or nonprofit organization. In some cases, they might also be part of a Real Estate Investment Trust (REIT), which has public stakeholder interest. Ultimately, the chief objective of these housing developments is to provide tenants with quality rental options and a stable return on investment to the owners. 

In most markets, rentals are few and far between. Finding (and affording) a rental unit in Arizona leaves most families with little wiggle room. Inventory isn’t necessarily low, but the costs for bigger units are still rising. This makes renting a home large enough to meet your needs more challenging than ever. Mixed for-rent housing communities are the right move for Arizona as the market sees a decrease in new construction on single-family homes.

The current interest rate environment

Arizona’s average mortgage rates are 6.48% for a 30-year fixed and 5.66% for a 15-year fixed. Before the pandemic, rates were much lower at 3.5-4%, and new home construction was at an all-time high. As we push further into 2023, rates will continue to stay high and could go higher.

When interest rates rise, home ownership becomes less attractive and more unobtainable than ever, leading more individuals and families to rent. Purpose-built for-rent communities can provide a stable and desirable alternative to homeownership, which can help mitigate the impact of rising rates on the housing market. 

The rising popularity of build-to-rent

Faced with the prospect of decade-high interest rates and speculation that they could go even higher, many would-be homebuyers are choosing to pursue less burdening housing options. Building-to-rent has been gaining popularity in recent years for many reasons.

  1. Rising home prices. Since owning has become cost-prohibitive to many people, more individuals and families are forced to rent. Purpose-built for-rent developments offer the perks of homeownership without the mortgage behind it. 
  2. Increased demand for rental housing. The need for new housing is also increasing as the population continues to grow. As developers seek to meet market demands, they’re taking a purpose-built for-rent approach. 
  3. Changing preferences of renters. Many millennials and young adults are choosing to rent rather than buy, looking for more than just a place to live. They want to be part of a community with amenities, close to public transit and walkable.
  4. Steady return on investment for stakeholders. Build-to-rent developments can provide a steady stream of rental income for the developer and a stable return on investment for investors.

Phoenix is a leader in build-to-rent

Developers across the country are watching Arizona as low-density rental home communities sprout up throughout the state. Phoenix in particular has become a leader in build-to-rent because of its strong job market and population growth. As more people move to the area for job opportunities and a relatively low cost of living, demand for rental housing has increased. 

Build-to-rent developments provide a stable and desirable housing option for these newcomers and residents looking for more amenities and services than traditional rental properties offer.

Another reason for Phoenix’s leadership in build-to-rent is its pro-development attitude. The city has made it easier for developers to build new rental housing by streamlining the permitting process and offering incentives for developers who build affordable housing.

It’s also worth mentioning that Phoenix’s build-to-rent market is still a relatively small portion of the overall multifamily housing market, but it continues to grow.

Built-to-rent is here to stay

Overall, purpose-built for-rent communities can play a critical role in a rising rate environment by providing a stable and desirable alternative to homeownership. However, the impact of rising rates on the availability and affordability of rental housing is complex and multifaceted. It depends on various factors, such as the local real estate market conditions, zoning laws, and the availability of financing.

It will be important in the coming years to strike a balance between affordability for tenants and profitability for investors. Ultimately, providing a variety of desirable housing options should be the focus of developers and local governments as our region becomes increasingly popular.