Residential Real Estate and Build-to-Rent

Residential real estate: an institutional perspective
Residential real estate (Residential) is the largest real estate sector in terms of total value, but it has historically been dominated by private investors. Over the past decade, there has been significant institutionalization of the segment, especially in multifamily (apartment buildings) and build-to-rent (BTR) formats.

Multifamily Fundamentals

Why multifamily is attractive to institutions

• Defensive characteristics — housing is a basic need
• Diversified tenant base — hundreds/thousands of tenants vs. one tenant in an office
• Short lease terms — capability to quickly raise rates in a rising market
• Inflation hedge — rental rates correlate with inflation
• Lower capex intensity — less tenant improvements than in commercial
• Demographic tailwinds — millennials and Gen Z prefer renting

Multifamily Classification

Key operational metrics

• Occupancy — proportion of occupied units (target: 94-97%)
• Economic occupancy — actual collections vs. potential income
• Rent growth — growth in rental rates YoY
• Turnover rate — share of tenants leaving the property annually (target: )
• Turn cost — costs of preparing a unit for a new tenant
• Bad debt — non-payment and write-offs

Build-to-Rent (BTR): a new institutional segment

Build-to-Rent is a format of single-family or townhouse developments constructed specifically for renting, not for sale. This is the fastest-growing segment of residential real estate in the US and other developed markets.

BTR Characteristics

• Format: Detached homes, townhouses, duplexes
• Community size: 100-500 units
• Amenities: Clubhouse, pool, dog park, maintenance services
• Target demographic: Families, working professionals, downsizers
• Average stay: 3+ years (longer than in apartments)

Why BTR is growing

• Affordability crisis — home prices outpace wage growth
• Down payment barrier — 20% down payment is unattainable for many
• Flexibility preference — millennials are not tied to one location
• Maintenance burden — renters don't want to worry about repairs
• Suburban migration — post-COVID flight to suburbs

BTR vs Traditional Multifamily

Student Housing

Student housing is a specialized segment focused on renting to university students:

Types of student housing

• Purpose-Built Student Accommodation (PBSA) — purpose-built for students
• On-campus — located on university grounds, often operated by the university
• Off-campus — near the university, operated by private operators

Key features

• Leasing cycle — seasonal cycle (pre-leasing in winter-spring for fall occupancy)
• By-the-bed leasing — leasing by beds, not by units
• Parental guarantees — parents act as guarantors
• University partnership — master leases with universities
• Amenities focus — study rooms, fitness, social spaces

Factors affecting demand

• Size and growth of university enrollment
• On-campus housing supply and pricing
• Quality of university (Power 5, flagship state schools)
• Share of out-of-state and international students

Senior Housing

Senior housing covers a spectrum of properties for elderly people with varying levels of care:

Senior housing typology

Demographic tailwind

• Baby Boomers are reaching senior housing age (75-85 years — peak entry age)
• 2030-2040 — "silver tsunami" of expected demand growth
• Limited new construction due to project complexity

Affordable Housing and LIHTC

Affordable housing — housing with restrictions on rental rates and/or tenant income:

LIHTC (Low-Income Housing Tax Credit)
Main subsidy program for affordable housing in the US:

• 9% LIHTC — competitive allocation, greater subsidy (up to 70% development cost)
• 4% LIHTC — as-of-right with tax-exempt bonds, lesser subsidy (up to 30%)
• Compliance period — 15-30 years rent restrictions
• AMI restrictions — tenants up to 60% Area Median Income

Investment characteristics

• Tax credit equity — investors buy credits from the developer
• Stable occupancy — waitlists in most markets
• Lower rent growth — restrictions on rate increases
• Lower volatility — counter-cyclical demand
• ESG appeal — positive social impact

Rent Control: risks and impact

Types of rent regulation

• Rent control — hard cap on rental rates (rare now)
• Rent stabilization — limit on annual growth (e.g., CPI + 2%)
• Just cause eviction — limits on eviction
• Inclusionary zoning — requirement for affordable units in new development

Markets with rent regulation

• Strong regulation: NYC, San Francisco, Los Angeles, Oregon (statewide)
• Moderate: California (statewide AB 1482), New Jersey
• No/Minimal: Texas, Florida, Georgia, Sun Belt

Effect on investment appeal

• Reduced upside in rent growth scenarios
• Premium for market-rate properties vs. regulated
• Higher cap rates in regulated markets to compensate for risk
• Focus on new construction (often exempt from regulation)

Institutional vs Retail Investors

Institutionalization

• Residential REITs: Equity Residential, AvalonBay, MAA, Camden
• Private Equity: Blackstone, Starwood, Greystar
• Pension funds: CPPIB, APG, GIC
• Sovereign wealth: Abu Dhabi Investment Authority, Singapore GIC

Advantages of institutional ownership

• Professional management
• Technology investments (PropTech)
• Bulk purchasing power
• Access to cheaper capital
• Standardized operations

Concerns and public policy

• "Corporatization" of housing
• Rent growth acceleration
• Eviction practices
• Regulatory backlash risk

Key Metrics for Residential Investments

Recommendations for CIO

• Sun Belt focus — migration and job growth favor South/Southwest
• BTR exposure — growing segment with institutional appeal
• Rent regulation awareness — underweight heavily regulated markets
• Affordability monitoring — rent-to-income ratios > 30% create risk
• Operator quality — residential is operationally intensive
• Supply tracking — monitor construction pipeline for oversupply risk