‘It’s staggering.’ Equity floods built-to-rent space as some lenders remain hesitant about sector.

‘It’s staggering.’ Equity floods built-to-rent space as some lenders remain hesitant about sector.

Keaton Merrell has been on a road trip of sorts in the past 90 days, traveling to different states and markets to talk about build-to-rent with lenders.

Merrell, managing director at commercial real estate finance firm Walker & Dunlop Inc., has been working in the build-to-rent sector for the past five years, when it was largely more of idea than a reality outside of Phoenix, the epicenter of single-family rental.

It’s a bit different now, with 80,000-plus build-to-rent units expected to deliver nationally this year.

“On the housing for-sale side, there’s just not enough product,” Merrell said. “People need a place to live and built-to-rent is filling that gap.”

Merrell, who originates loans nationally for multiple real estate asset classes, said more and more lenders are participating in build-to-rent projects, but it’s still new territory for a lot of bankers. Outside of Phoenix, there aren’t a lot of data points yet to back up a pro forma, Merrell said.

Bethesda, Maryland-based Walker & Dunlop in a report this week said large institutional groups have fewer problems accessing capital for build-to-rent, but smaller, middle-market firms are facing challenges, from the construction lending sector in particular.

It’s typical to go to five to 10 groups when going to market on a loan for a traditional multifamily project, Merrell said. For build-to-rent, it’s more like 20 to 30.

Because there aren’t enough banks in the space right now, build-to-rent developers are moving forward with lower leverage or mezzanine financing, which is more expensive. Bridge lending in build-for-rent is emerging as a new product, Walker & Dunlop’s report noted.

Transcendent Electra, a joint venture of Florida firms Transcendent Investment Management and Electra America, last year formed to target the build-to-rent and single-family rental markets. Transcendent Electra’s fund aims to buy $3 billion worth of homes, or 15,000 units over the next five years, to rent across Sunbelt metros.

Jordan Kavana, founder and CEO of Transcendent Electra, said the venture has about 15 build-to-rent projects underway today. He said the landscape for financing build-to-rent has changed in the past couple of years.

“We’re seeing some really interesting debt platforms evolve,” he said. “(There’s now more of) a total lifecycle development view instead of an aggregation view.”

Both Kavana and Merrell noted the amount of equity flowing into build-to-rent today, especially as other real estate sectors like hospitality, office and retail have become more uncertain through the Covid-19 pandemic.

“There’s more equity in the space than there are deals,” Merrell said. “It’s staggering.”

Kavana said financing build-to-rent has gotten easier and more difficult at the same time. While there’s a bit more confidence in the sector today than even two years ago, it’s also gotten very popular very quickly.

If everybody has the same three- to five-year business plan, capital sources might start wondering how much the market will be able to absorb at one time, Kavana said.

He said he anticipates consolidation in the sector in the next two years. There were 10 to 15 players in build-to-rent when he first started; now, it’s 100-plus, he continued.

“I think capital markets are going to quickly realize the most important thing to solve for is not the group that does the most scale but, rather, the most precise execution,” he added.