Transcript
Dean Wehrli:
Welcome to New Home Insights, the John Burns Real Estate Consulting podcast about all things U.S. housing market. I’m your hosting Dean Wehrli. Today, we’re going to again explore the world of build-for-rent, BFR. Today, though, we’re going to do that with Branden Lombardi, he’s the president of BB Living, one of the largest BFR operators in the world, I think you could say.
Dean Wehrli:
We have a range of topics to cover, but really we’re going to delve in pretty deeply with just BFR as a real estate asset class and how that teases out. So, how are you doing, Branden?
Branden Lombardi:
I’m doing well. Thanks for having me on today, Dean. I appreciate it.
Dean Wehrli:
Our pleasure. And thanks for coming on. So, I’ll let you tell us about BB Living. But let’s start with just some background on you before we get to the background on BB Living.
Branden Lombardi:
Sure. Well, as far as the real estate industry is concerned, I’ve been in the business for, it’s about 20 years now. I started back on the land brokerage side, which was a great learning experience. So, I worked for Land Advisors Organization for Greg Vogel back in the day and learned pretty quickly how the bill of goods I was sold that land brokers do half the work and make twice the money wasn’t quite true. But no, in all seriousness…
Dean Wehrli:
Greg told you that?
Branden Lombardi:
No, Greg did not tell me that, somebody else told me that.
Dean Wehrli:
I was going to say.
Branden Lombardi:
And that’s what led me to Greg.
Dean Wehrli:
Oh, gotcha.
Branden Lombardi:
Yeah no, obviously it was a great place to kind of learn the business starting pre-run up in Phoenix in 2004, 2005 and ’06. That was an exciting time. At the same time, a monkey could pick up a phone and make a phone call and sell a piece of land, right?
Branden Lombardi:
So, obviously the downturn was a real learning experience going through that whole process. And so, in 2011, after making all the way down and at least starting to see some glimmers of light, I decided I didn’t want to be a broker. I liked being more in the mix. I wanted to be more of a principal and have a little bit more of the control, you’d say.
Branden Lombardi:
And so, I started working on deals on my own and looking at various things. And actually was at the Beazer pre-owned homes REIT, which was one of the first SFR REITs late 2011/early 2012. I thought it was a really intriguing opportunity to invest in the housing market in a different and unique way.
Branden Lombardi:
Obviously the scale was tremendous and that was a real learning experience for me, just understanding the single family rental market. And then I’d had a long time relationship with one of my now partners and one of the co-founders of BB Living, Darryl Berger.
Branden Lombardi:
And long story short, we started working together. They had finished the first build-to-rent project that they had done at Higley Park and started working together on some additional deals here in Phoenix. And it’s been off to the races ever since.
Branden Lombardi:
Build-to-rent, early on, we were certainly truly pioneers in this space. There was a few others in Phoenix. This has been the birthplace for the build-to-rent movement. And that’s been really exciting to be a part of. And we formed a partnership with Toll Brothers back in 2019 to expand the business beyond Phoenix.
Branden Lombardi:
And we’re now nationwide in a number of markets and continue to look to grow and add new markets. And obviously through COVID, it was a trying time to continue to try to grow a platform nationally, but we’ve worked really hard and I’m really proud of the portfolio of communities that we’re developing right now and what we’re looking to deliver in the next couple of years.
Branden Lombardi:
And obviously now the attention is fully on this asset class and this business. And that certainly brings a new challenge to our work on a daily basis. But yeah, that’s my experience in a nutshell. Seeing the ups and the downs, I certainly think that my experience early on in the business colors my viewpoint on the world and what we do or don’t do here at BB Living from an investment standpoint.
Branden Lombardi:
And I also have great partners and colleagues that started this business and we continue to operate it together. And as a team we’ve, I think, made some pretty good, sound decisions that will set us up to be around for another decade plus moving forward. Even if the surge of activity in build-to-rent only lasts for a few years, we think there’s real staying power in this business and we’re excited to keep building BB Living.
Dean Wehrli:
Definitely. Now speaking of what colors your outlook on, well, your work and your life, can we just touch on a little bit your personal story. You are a fairly young cancer survivor and that’s really colored your outlook as much as anything can stamp it. I imagine.
Branden Lombardi:
Yeah, sure. So, I was diagnosed with bone cancer at the age of 17. So, my senior year in high school, the second half of my senior year, I spent 15 of 80 days in school and the other 65 in the hospital. So, it wasn’t really the way that I had seen my senior year of high school playing out.
Branden Lombardi:
And unfortunately, it wasn’t just a six month thing. It turned into a three plus year battle of lots of surgeries and chemotherapy and ultimately a stem cell transplant. But taking the long view, I just celebrated 20 years from my stem cell transplant in October. I’m 20 years clear of the last of the cancer that had originally spread to my leg and then to my lungs multiple times.
Branden Lombardi:
And so, yeah, after 25 surgeries, my initial diagnosis and five recurrences, three years of chemo and that stem cell transplant, it all feels so far away, but it certainly is with me both physically and just emotionally, like you said, coloring my outlook.
Branden Lombardi:
I think that has always helped me in the business be a bit more optimist, even in the worst of times and in worst of environments. There’s always a way to say, well, it could always be worse, right? And so, sometimes that maybe comes across as a little flippant, but I think that does help me weather the storm in my professional life and my personal life.
Dean Wehrli:
God, that would be awkward if you said it could be worse and someone teased you about that and said, well, let me explain. That would be-
Branden Lombardi:
Yeah, exactly.
Dean Wehrli:
Well, that is a pretty inspiring story, Branden.
Branden Lombardi:
Thank you.
Dean Wehrli:
Thank you for sharing it-
Branden Lombardi:
Yeah, of course.
Dean Wehrli:
… for sharing that. And that would, I mean, you either embrace it and fight it or you succumb to it, and you fought it. I mean, I don’t get me wrong. Obviously, that ends badly for a lot of people who are fighting it with all their might, but it’s amazing that you’re able to get through it.
Branden Lombardi:
Well, there’s certainly that element of dumb luck. And then also I think being 17 when I was diagnosed, I just didn’t know any better. Right? I had grand plans for my life and I wasn’t going to become a statistic. That was my mindset. However well informed or uninformed I frankly was, I didn’t know.
Branden Lombardi:
I didn’t know what the expectations were. Frankly, my family and my doctors, I think, tried to shield me from the more grim side of the reality. It wasn’t until I was almost done with my stem cell transplant that I even knew what stage my initial diagnosis was at. Nobody had ever told me. And frankly, I didn’t care enough to ask. I was just focused on getting back to the life that I had sort of lived when I was in and out of college. Going back and forth between treatment and focused on that aspect of my life as opposed to, oh, was it stage one, two, four.
Branden Lombardi:
Whatever it was, frankly, it didn’t really matter. I mean, I knew it was bad. I just didn’t ever know until after the fact how dire the situation was. And that’s one of those things even 20 years later, there’s a little bit of that, oh yeah, that was not great.
Dean Wehrli:
Yeah. Yeah.
Branden Lombardi:
But I feel healthy, I’ve never felt better. I think that’s the exciting part. And what we’re doing here, and from a business standpoint, being energized. I have a great family, I have a great wife, I have a 13-year-old and a four-year-old that keep me busy. And so, all of that stuff are good things and motivate me in the right way.
Dean Wehrli:
Okay. You look 29, just FYI. So, stop talking about 13-year-old kids. Well, anyway, thank God for science with five stem sell things. And then thank God you’re still here to talk to us.
Branden Lombardi:
Yeah. Yeah. That’s right.
Dean Wehrli:
Now for the awkward transition into the business at hand, which is, let’s start talking about BFR really as an asset class.
Branden Lombardi:
Sure.
Dean Wehrli:
So, to start, for instance, do you see your BB Living operating more like a developer and operator of apartments or a little bit more like a for-sale, like just a builder?
Branden Lombardi:
Well, so I think it’s a very interesting question and topic. I think, one, build-to-rent as an asset class describes a broad range of both product and investment thesis. Right? You have a ton of players all doing a little bit of a different thing.
Branden Lombardi:
And so, to your question about are we more like a for-sale builder or more like an apartment developer? My answer is, it depends. What part of the process are you talking about? We look to acquire land more typically like maybe a multi-family developer buying a 20 or 25 acre site that we then plan on a self-contained basis as opposed to a more typical conventional subdivision, that’s what we do here at BB Living.
Branden Lombardi:
From the product standpoint, BB Living is much more conventional, right? We only build three and four bedroom homes. All of our homes have attached two car garages, the product ranges, our smallest product series, the smallest floor plan is 1,500 square feet and our largest is 2,500 square feet. But our average product, whether it’s our attached townhomes or detached single family homes, are somewhere in that 1,800 to 2,000 square foot range. Right?
Branden Lombardi:
So, that’s the area that we focused on is, early on when Matt, Sam, and Darryl started BB Living and started the Higley Park community, those were all three and four bedroom homes. They had built a bit of a scattered single family rental portfolio and clearly seen the demand for more of a conventional housing product from the market that was not being met by apartments. Right? And frankly, wasn’t really being met by the one-off mom and pop landlords.
Branden Lombardi:
And so, that’s the tac that we’ve taken. Again, build-to-rent encompasses so much from a product standpoint. You’ve got the horizontal apartment guys on the one end, right? They’re building very similar floor plans. Two apartments. 600 square foot one bedrooms, 900 square foot two bedrooms, and where there are three-bedroom plans, let’s call it 1,200 square feet.
Branden Lombardi:
But those are still really, I view that much more like multifamily, right? It’s just less dense. It’s single level living, there’s a real value there, the market has taken to it very well. And then again, on the extreme end of the spectrum, there’s more of the BB Living product, which is much more conventional comparable to the for-sale product that home builders are building and selling on a daily basis.
Dean Wehrli:
Would you ever do that kind of horizontal apartments or something really, really dense?
Branden Lombardi:
That’s not our MO, at least for today. We have gotten more dense on attached product in certain locations. We have an infill project in Centennial, Colorado that is about 15 to the acre, a three story town home product. And we’re always looking to iterate and make sure whatever product we build is really going to meet the market.
Branden Lombardi:
That’s the biggest thing we want to ensure of, right? Is wherever we’re building, our default is always to build more of that conventional, detached, single-family home, albeit at a slightly higher density than the for-sale builders. That’s how we can compete for land. We want people to have that single family home experience, but in certain markets and in certain locations, infill locations, there are markets across the country where attached townhomes are just much more widely accepted.
Branden Lombardi:
And so, we look to find our spot in each location and within the market and deliver the right product. So, yeah, we’ll go dense. We just won’t go to that horizontal apartment product. Which frankly isn’t that dense, right? It’s 12 to 14 to the acre. Because at some point, it makes more sense just to go vertical, right? And building more typical garden style apartment or mid-rise or something like that. And that’s just not our business plan.
Dean Wehrli:
Speaking of density, that’s actually a great segue. You hear a lot about BFR developers being able to outbid their competitors for land. You also hear a lot about that has to do a lot with density. Is there more nuance, I guess, to that reason for the outbid?
Branden Lombardi:
I mean, my personal opinion is, yeah, it’s not purely just density, right? Because when you’re building it, let’s call it 10 to the acre, your per unit price may be coming down and that may allow your residual to go up, right? Because if you’re paying 40 grand a door for 10 units per acre, it’s 400 an acre versus paying 50 a door for five to the acre, right? There’s a pretty big delta there in the land residual.
Branden Lombardi:
But I also think the other part of it is, again, they’re in these early stages of the asset class. You’re seeing some of those different strategies develop. There are some groups that are going to build and look to exit as quickly as possible, right? Much more of that merchant build scenario. Right? So they’re going to look for that development spread that gives them comfort that all the risk they’re taking will be rewarded.
Branden Lombardi:
But then you have others that they’re going to build these homes and add them to an existing rental housing portfolio where they never have to exit. Right? So, the groups that are doing that, they’re looking at buying land, they’re going to build 100, 200, 250, 300, whatever number of homes. It could be 10 homes. But they’re not looking at it as a community necessarily on a standalone basis and they’re not looking to exit and ensure that they achieve certain return metrics, they’re looking at it and saying, “Hey, I just added 10 new brand new homes to my portfolio or 100 brand new homes to my portfolio in Metro Phoenix or Metro Dallas.”
Branden Lombardi:
I never have to exit, I can get much more aggressive on my land price because my yield on those homes can be much lower. Right? And so, I think that’s also clouding the picture a bit when it comes to land price and what and who is willing to pay certain prices.
Dean Wehrli:
So, to make sure I understand that well enough, so the buyer who has a little bit shorter time horizon is not going to be as willing to pay that top dollar as the longer hold time horizon folks.
Branden Lombardi:
Correct, yeah. Yeah. There is investors out there doing build-to-rent that, like I said, they never plan to sell the home. Right? And that gives you a whole lot more leverage when it comes to the land price, and frankly, the cost basis you’re willing to take on for the home. Versus somebody like BB Living, we’re looking to achieve a pretty typical developer spread.
Branden Lombardi:
We would love to own all of these forever, but that’s not our current business plan. In some locations, maybe it will be. We have the flexibility and the latitude to figure that out as we go. But we’ve certainly transacted in a number of instances and been rewarded for the hard work that we’ve done. We think that will continue to be the case, but that also makes us maybe a little bit less aggressive than some of those other groups out there.
Dean Wehrli:
Haven’t a lot of the actors though gravitated to the buy and hold longer term strategy? Because remember when BFR first became a thing, a lot of the folks were pessimistic or at least suspicious about it. And one of the reasons for that was, oh, they’re just going to dump all this stuff when the market recovers. It’s 2012 or ’13 and the market was still not perfect. Have most of the BFR operators migrated to a little bit longer horizon?
Branden Lombardi:
Well, I think maybe then we’re getting into another segment, which is more of like single-family rental. Right? And we could bucket all of this up and call it rental housing. My colleague, Matt Blank, talks about the merging of single family rental, build-to-rent, and multifamily into just a broader rental housing asset class, which I think is where we are trending ultimately here.
Branden Lombardi:
Yeah, the single family rental players, the Invitation Homes, American Homes 4 Rent, Progress, all of those groups that do have that bigger portfolio, the broader time horizon as far as the investment is concerned, certain groups are making inroads into build-to-rent and aren’t looking for that exit.
Branden Lombardi:
So, I think there are certainly the group of those and there’s some larger investors. The capital markets are definitely trying to take advantage of this space and looking at it with a longer term horizon. I think there is still probably a dearth of operators that can effectively go through the entitlement, development, construction, lease up part of it and then ultimately exit.
Branden Lombardi:
I think some people are, frankly, just trying to take advantage of the demand that currently exists, and for good reason. It’s a great business. We believe in it. But I think you’re going to see a continued settling where the capital that is chasing, let’s just call it, rental housing in general looks at build-to-rent and is willing to pay a premium for more of the stabilized communities, as opposed to backing operators to develop it out.
Branden Lombardi:
And there’s going to be a balance of course, but I think that’s where ultimately the bigger pot of money will settle is, hey, I’m going to buy this stuff when it’s finished and stabilized and I’m going to operate it no different than I operate the rest of my multi-family housing portfolio across the country.
Dean Wehrli:
You may have just partially answered this, but my next question is going to be about BFR is just a hugely attractive investment right now to the capital class. Tease that out a little bit. Why is it so sexy to those folks right now?
Branden Lombardi:
Yeah. I mean, I think it’s a couple of things, right? One, you go back to the last major recession and the foreclosure crisis really created this opportunity that had not previously existed to buy single-family homes in the United States at scale, right? So, that’s always a really attractive asset class to get into. And this was a new and a different way to do that.
Branden Lombardi:
And now build-to-rent comes. It’s not taking away from the existing housing stock from a for sale perspective, it’s adding, again, we’re segmenting, there’s a bunch of different products being built in a variety of locations. And so, you can meet the market at different levels from a rent rate perspective or a location perspective.
Branden Lombardi:
And so, I think part of that is just being able to, again, offer something new and different to the consumer that they frankly didn’t really know existed, right? If you’re going to rent something 10 plus years ago, the default was an apartment, right? And frankly, that still is the default from a scale perspective.
Branden Lombardi:
But now there’s this growing opportunity for people that, hey, I don’t want to squeeze my family when we’re moving from San Francisco to Dallas, I don’t want to squeeze into a three bedroom apartment. I can go rent a three or four bedroom home in one of these build-to-rent communities, hopefully it’s a BB Living community, have a really different experience and be much more circumspect and thoughtful about where I ultimately end up buying a home.
Branden Lombardi:
Because I don’t think the overall pattern of people wanting to buy and own a home is going to change. We’re not in the business of trying to materially change the U.S. consumers’ mindset, we’re offering an alternative, right? And that can fit for a number of people that we may have people that stay with us for a decade in our communities or rent in perpetuity because they like that and the flexibility it gives them.
Branden Lombardi:
But we know certainly there’s a lot of people that are renting from us in that try before you buy methodology, right? They’re going to rent a home in a certain community and there’s 5, or 10, or 20 for-sale options in the surrounding area. They’re going to pick. And that’s why we’re so focused on location. We stumbled into the master plan communities from a location standpoint, but realized that, hey, they’re well-amenitized, they’re typically in really good locations, the other for-sale builders in the community are generating activity in traffic and they’ve already qualified the location. Build-to-rent in a master plan really is another segment, right?
Branden Lombardi:
It provides additional segmentation. And we saw it at Vistancia out in Peoria, we saw it at Verrado, we see it in Eastmark, across the country where that try before you buy. Somebody comes in, they’re going to rent from us for a year or so and then ultimately buy a home in the community because they’ve gotten ingrained into the community culture, their kids are going to the schools. And that’s really a new option that didn’t necessarily exist for more of an institutional scale and perspective.
Branden Lombardi:
They could always go rent a one-off home, but that comes with its own issues and problems. And so, now you see this new product being developed. And so I think that, again, that opportunity to give the market something that they maybe didn’t even know they wanted and now they have the opportunity to get it, I think that’s a big part of it.
Branden Lombardi:
I think COVID has had a huge impact from the standpoint that people don’t feel necessarily the pull to be in the urban core or as close to their jobs. And they’re willing to trade maybe a longer commute because they’re only having to do it a couple of days a week for more space. Right? And so, again, a 1,200 square foot apartment versus a 2,000 square foot home with even just a little bit of a backyard is seen as an upgrade, right?
Branden Lombardi:
And that just gives people more optionality and flexibility. And I think that has really been a catalyst over the last year for the growing interest in the asset class.
Dean Wehrli:
What you said about master plans a minute ago is amazingly true. And I know that’s a thing now. I know it’s happening in a lot of places now, but I’m shocked that it’s not in really any master plan with at least, what, five or six product types neighborhoods should have one of those a BFR almost rotely. It should just be as part of the norm.
Branden Lombardi:
I think you will see that as the norm moving forward. I mean, again, it took some convincing and there are some developers that we are truly grateful to for taking a chance on BB Living early on, whether here in Phoenix or in other markets when we were expanding.
Branden Lombardi:
But in our initial portfolio of 3,400 homes, 85% of those are in master plan communities. And that’s really been a strategy that we’ve employed. Now, stand-alone communities work just as well, where we just go buy 20 or 25 acres in a well-located sub-market, build the amenities, build the infrastructure and operate more on a like a multifamily community, just the product being different.
Branden Lombardi:
But yeah, I think the master plans are all starting to incorporate this. I think there’s still some iterating and learning. It doesn’t need to be in with the mixed use, it can be part of the residential, it can be integrated in the community. You can have your own amenities, you can give access to the rest of it. And that all just depends on the specifics of the deal and the location.
Branden Lombardi:
And we’ve done it all ways at this point, and I’m really excited about that because I think it’s a great fit for the kind of master plan concept to have another segment that is not just apartments and is not just for-sale housing.
Dean Wehrli:
Yeah. It really is a win-win and there still is. I can tell you, we do a lot of master plan studies and there’s still very often that leeriness, they think of it like apartments or like you said, they want to locate it in a place where, no, that’s not where you need to do it.
Dean Wehrli:
You mentioned SFR a minute ago as well. Is it true that BFR is a little easier for, again, the investors to understand because they’re a little more like traditional multifamily than SFR is?
Branden Lombardi:
Yeah. Yeah. Yeah, for sure. Over the last couple of years, when we have decided to sell one of our BB Living communities, the first handful, we didn’t really broadly market them or go through that process and sold them to some of the single family rental REITs.
Branden Lombardi:
And that was all well and good, because that seemed like the natural buyer for BB Living. One of our communities earlier this summer ultimately was bought by a single family REIT. But we’re starting to see a lot more engagement from multifamily investors in the asset class. I mean, from the biggest institutional multifamily investors to high net worth individuals that have been buying apartments for the last several years across the country really coming into the space.
Branden Lombardi:
Because that’s what it does, right? It takes the concept and the attractiveness of scattered single family rental and it brings it down from a scale standpoint to one location. It’s a little bit easier to operate, it provides scale, and again, you can operate it. Very akin to a multi-family project, it’s just a neighborhood of homes as opposed to an apartment complex.
Dean Wehrli:
I imagine it’s just easier for them to get their head around it because it’s something they understand and SFR is a little more new.
Branden Lombardi:
Yeah.
Dean Wehrli:
What are the, I don’t know, investment metrics or the criteria that you look at at BB Living when you’re allocating your resources? Are you looking at a market? Are you looking at a specific deal? Is there something you really, really focus on?
Branden Lombardi:
Well, so, again, at BB Living with our products, they’re all three and four bedroom products and more of that conventional product. One of the things that we’ve seen is a really strong demographic, and again, I think that goes back to our very first community and the very first few communities that we did, whether in a master plan community or not, we were looking for really well-located land, really good school districts, right?
Branden Lombardi:
Our demographic, 39-years-old, two working adults, one child, half a pet, average household income about $140,000. Right? And that demographic, it mirrors a for-sale demographic. And again, going back to it, we know a lot of our residents are either selling a home and transitioning with us for a period of time or they’re going to be buying a new home. And so, they’re using it as a way point.
Branden Lombardi:
And then we have people where, frankly, the economics are such that they may make really good household incomes but they don’t have the down payment, especially in some of the areas we’re building where, with housing prices being where they’re at today, the economics to buy a home and afford that down payment, that’s really the obstacle for people, right?
Branden Lombardi:
So now they can rent from us. They’re paying a similar monthly payment from a rent perspective as they would for the mortgage, but they didn’t have to come out of pocket 5%, 10%, 20% along with all the iterating closing costs and so forth. And that’s really where the economic benefit to BB Living or build-to-rent is, is that upfront cost is so much lower and you’re getting a quality product.
Branden Lombardi:
And especially in the BB Living communities, we’re very focused on resident experience, the location, the school districts that we build within. And so, those are really the key metrics, right? I guess the best way to describe it is, we are definitely trending towards being more like the Toll Brothers of the build-to-rent asset class, right? That’s the BB Living philosophy. It helps that they’re our partner, but they talk a lot about being at Maine and Maine, right?
Branden Lombardi:
We want our communities to be in the best locations possible across the country and offer an alternative housing experience for people from a for-rent perspective that is attractive, right? And so, higher buried entry locations are certainly where we’re focusing, but you see it across the spectrum. There’s build-to-rent going up across the country.
Branden Lombardi:
There’s an extreme shortage of housing supply. And so, I think at least for the near term, all of these locations give people options. And I think that’s another attractive part about this, but I think that’s something that we’re very focused on is maintaining the quality of our locations and focusing on those school districts, demographics, proximity to employment and transportation.
Branden Lombardi:
It’s not rocket science, right? Real estate, the cliche is location, location, location. And we take that to heart every day here at BB Living.
Dean Wehrli:
That was a great answer and a very encompassing answer, but you had me at half a pet.
Branden Lombardi:
Half a pet. Yeah, that’s my favorite stat. I don’t know how it works out. And I always say it’s the good half. Right?
Dean Wehrli:
I’m just glad to hear it’s a stat. That’s the key. It’s just a stat.
Branden Lombardi:
Well, I think it’s important because I think that’s one of the things, right? An apartment doesn’t necessarily lend itself as well to pet owners. We have far less restrictions when it comes to pets. We have the yards, and in almost every instance, we always try to add private outdoor space for pets and people to enjoy. But yeah, I like the half a pet stat.
Dean Wehrli:
Let’s get into motivation a little bit before we circle back.
Branden Lombardi:
Sure.
Dean Wehrli:
Is that you mentioned upfront cost are a big motivation for your renters, maybe not having the down payment. I mean, what are the key pushes into BFR for you at BB Living?
Branden Lombardi:
As far as the consumer’s concerned?
Dean Wehrli:
Yeah, exactly. The renter, consumer, why are they there besides the upfront cost that you mentioned a minute ago?
Branden Lombardi:
Well, I think the opportunity to rent a new home, right? And again, we’re very focused on creating community. We did some resident surveys a while back and one of the things that we, I think, always anecdotally thought was true was like, hey, designing a community matters. How it lives, and breathes, and looks and feels, and who’s there, that that matters. But that was actually proven out in the responses from our residents.
Branden Lombardi:
One of the things, we’ll use the master plan example, but building a on a parcel a somewhat self-contained subdivision. What I mean by that is just simply we’re building 150 homes in one location. They’re not scattered throughout the master plan, but having a BB Living community in a master plan, the residents like that their neighbors are in a similar situation, that there are renters.
Branden Lombardi:
There’s not that kind of push and pull between homeowner versus renter. Oh, my neighbor rents out their home and I own my home and some of the conflict that could come from that. It’s unfortunate, but there still is a bit of a stigma associated with renting, right? We deal with it on a daily basis, whether educating municipalities about who we are and what we do to residents in existing communities where we’re buying a piece of land and coming in and they have questions and concerns.
Branden Lombardi:
But frankly, again, our demographics are no different. Our cost of rentership, let’s call it, is at a point where it meets or exceeds the cost that many existing owners pay on a monthly basis for their mortgage. Again, just removing that down payment. But I think attractiveness of the locations is critical for BB Living.
Branden Lombardi:
I think, again, the economic part of it can’t be overlooked, but new product. I mean, again, I don’t know what the stats would be about how many people ever own a new home in their lifetime, like a truly new brand new home. I’ve never owned a new home. I continually buy older homes, which is, I think, a personal fault. But that opportunity to live in a new home and a new community, the first one in, or the second one in, I think that’s pretty attractive to people.
Branden Lombardi:
And again, it’s just, it’s an alternative product to what they typically maybe thought that was available to them if they were not going to go buy a home.
Dean Wehrli:
A factor I don’t hear a lot, but I think is important, tell me if I’m crazy, is the low maintenance opportunity in the literal sense. Not in the lock and go sense, but in the sense that if your garage door breaks, you just call someone as opposed to have to fix it yourself.
Branden Lombardi:
Well, that’s a tremendous point because a few years ago, one of the groups who did a study and tried to quantify what the cost of home ownership was from an ongoing maintenance perspective. And it came out to on a monthly basis, if you did it over the life of a 30-year mortgage that you would have on your house, it was like some tremendous cost, right?
Branden Lombardi:
Now that included you have to update your HVAC system or replace carpet or flooring and all those things. But yeah, when somebody rents from BB Living, one of our residents said it, “I put my head on the pillow at night and I don’t have to worry about anything else.” We’ll change light bulbs, air filters, we’re maintaining the landscaping.
Branden Lombardi:
So, all that stuff is done for you. When somebody moves out, the home is turned and reconditioned so it feels just as new as it did the first time. And I think that is a tremendous aspect that probably does get a bit overlooked is that you really can focus on other aspects of your life, right?
Branden Lombardi:
Our slogan is simply live more. We want our residents to focus on the things that bring them joy day in and day out as opposed to fixing the garage door or having a sink that doesn’t work or whatever. All of that’s taken care of. And that’s a big part of our strategy. And our resident experience is making sure that the management and the maintenance of the communities is at a very high level.
Dean Wehrli:
Yeah. Because I think plumbing does not bring joy to really anyone, I’m assuming. Certainly not me.
Branden Lombardi:
Yeah.
Dean Wehrli:
Let’s talk about, now BFR, the future and how this plays out. Let’s start with how the market is right now for the rental sector as a whole is just tremendous. I mean, I think RealPage just came out with their latest third quarter stats and nationwide is about 2.8% vacancy rate. Just a hugely landlords’ market. Do you think we’re in for some pretty significant rental increases here over, at least, the short term?
Branden Lombardi:
I mean, for sure, right? I mean, supply is still at such a premium. I don’t know that that changes. I don’t know that we can expect some of the rent growth we’ve seen in the last 12 or 18 months. I mean, we’ve seen 20%, 30%, 40% lease over lease increases in rents. And I don’t know if that’s sustainable. It’s certainly not how we underwrite.
Branden Lombardi:
But yeah, supply is still at such a premium. And frankly, it’s not getting any easier to build a home or an apartment for that matter with all the supply chain and labor constraints that we have in the broader construction industry. So, I do see rent continuing to increase for the foreseeable future. Some of that may just be forced on the market by the fact that we’re buying more expensive land, building a more expensive home. And so, to achieve the same economic results, rents have to be higher.
Branden Lombardi:
We’ll see how well the market tolerates that. Right? But I think that there’s definitely going to be continued upward pricing pressure on rents until we get to more of a normalized supply and demand balance in the market which, again, is really a market by market thing. But here in Phoenix, when you have 8,000 active listings on the resale market, yeah, we’re trying to do 30,000 new homes, 35,000 new homes and another 10,000 apartments, but we’re barely meeting the existing demand, forget the fact that we’ve been under-building for a decade.
Branden Lombardi:
And that’s a similar story throughout much of the country where the population growth seems to be occurring most rapidly. And that’s the locations that we’re in, right? We’re in Phoenix, Denver, Boise, Dallas, Austin, Southwest Florida, all those places have some type of constraints from a material or labor standpoint that is making home building incredibly difficult these days. And I think that tamps down that supply and will continue to drive up both housing prices and rental rates for the foreseeable future.
Dean Wehrli:
What do you think the longer term trend, I mean, is BFR… I’ve heard some people talk about a five to seven year runway here. I mean, are you optimistic in that sense as well for BFR?
Branden Lombardi:
Yeah, for sure. I think we definitely have a longer term outlook. I mean, we’re going to build a whole lot of houses in the next five to seven years. That’s just what we have on the board today never mind what we continue to acquire and plan for over the next couple of years.
Branden Lombardi:
But yeah, again, we view this as a long term business. We’re very bullish on the opportunity. We’re going to remain very disciplined though. And to your question, I think build-to-rent will continue to segment out and get away from being this catchall. There’s going to be the horizontal apartment product which really folds in with multifamily. There’s going to be different build-to-rent strategies that serve different price points in the market.
Branden Lombardi:
Not everybody drives around in a Honda or a Toyota, there’s a reason there’s 50 million different car companies out there. Right? And the same thing with housing, we don’t look at for sale housing and just say, “Oh, it’s all the same.” Right? You have entry level, first move up, luxury, whatever the different segments are. I think build-to-rent will naturally mirror that driven by the location and the product where it’s being delivered.
Dean Wehrli:
Okay. How about mortgage rates? That’s our interest rates, I guess I should say really. Well, kind of both though. Are you worried about the finance or the investment appeal of BFR if interest rates continue to climb? Could that just detract from the attractiveness as BFR as an investment vehicle?
Branden Lombardi:
Well, so if you think about it, single family rental and build-to-rent in the very early days worked because we were buying finished lots below replacement costs. We were building a new home for less than the cost of an existing home. And it was really viewed as this recessionary opportunity, right? And then we, over the last several years proved it worked in a more normalized market. And now it’s working in a really hot market too from a for-sale perspective.
Branden Lombardi:
And so then looking forward, it’s like, it’s not a silver bullet for whatever condition the market’s in. But if you look at it, if interest rates go up and that takes more people out of the for-sale housing market, they still need a place to live.
Branden Lombardi:
So, maybe our rental rates don’t grow quite as fast or they’re not quite as high if it’s more like a stagflationary environment, as opposed to a truly inflationary environment. But people still need a place to live and people may make the decision, “I’m going to rent as opposed to buy,” and wait to see what happens with the market. If interest rates go up.
Branden Lombardi:
At the same time, that certainly has impact on cap rates. We’ve seen tremendous compression in build-to-rent from a cap rate perspective where it used to be, okay, well, maybe it’s 50 or 75 basis points above class A multifamily to now it’s tight with multifamily as far as cap rates are concerned when these assets go to trade on a cap rate basis.
Branden Lombardi:
So, yeah. Could there be some cap rate expansion from where we’re at today? Yes. But we never thought it would be at the levels it’s at from a cap rate perspective today. And I think it still makes an incredibly attractive asset class moving forward definitely if there’s increases in mortgage rates, especially with housing prices being where they’re at. I just see that naturally leading more people to decide, at least, I’m going to make a short term decision and rent for a year or two or three, wait to see where the market settles.
Branden Lombardi:
And then also, if housing appreciation continues to run, that’s just going to price more people out of the market that way as well and more people will naturally fall into looking to rent but not wanting to be in an apartment necessarily. So, I feel pretty good about where we’re positioned in the market. And I feel like we’re certainly keeping our eye on things like interest rates and that cap rate potential expansion going the other way and away from us.
Branden Lombardi:
But I think we’re in pretty good shape for, like you said, for the foreseeable future, at least, from the attractiveness of the investment.
Dean Wehrli:
Yeah. So, you actually just answered my next question, which is, from a mortgage rate perspective, it actually could push some demand toward you.
Branden Lombardi:
Yeah.
Dean Wehrli:
So, that could enhance there. But from a cap rate perspective, I guess what you said is that you have a little bit of a cap rate buffer kind of, is that fair?
Branden Lombardi:
Sure. Yeah, I think so. I mean, again, you look at where these things have been trading, whether it’s a horizontal apartment deal or a build-to-rent deal. And I try to create some level of distinction, but the cap rates are the same. And so, if they’re as low as they are today, what really drives them the other way, maybe they grow over the next couple of years, 25 or 50 basis points. If rates really starts to rise, maybe it’s more. I don’t have a great crystal ball. It’s pretty cloudy most days.
Branden Lombardi:
But I like to think we’re in pretty good shape, again, because we are being pretty thoughtful on the way in as to how we underwrite and what we really look for from a metrics standpoint and ensure that we’re achieving.
Branden Lombardi:
We always look at everything in today’s environment. If we achieve rents and today’s cost, what does that deal pencil to? And if we feel comfortable about that deal, we move forward, but we’re not trying to get too far ahead of it and really project out 10 years from now. We try to keep it to today within a five-year timeframe and assess the opportunity that way.
Dean Wehrli:
Do you see the BFR as a class segmenting into that class A, B, C categorization that traditional multifamily has?
Branden Lombardi:
Yeah. I mean, again, if you want to call it class A, B or C or more maybe of the entry level, move up and luxury, I mean, I think either of those is a fair way to categorize the asset class moving forward. Again, I think it’s really driven by a location, right? Not all locations are created equal. You’re going to be able to get a much different rental rate in Gilbert, Arizona as you’re going to get in Casa Grande, Arizona, at least today. Right?
Branden Lombardi:
And so, and people are going to build to the market and build to what works and pencils from an economic perspective. And that’s going to force people to make decisions. And then, again, the kind of segmentation, we know that we’re looking at a smaller slice of the pie with three and four bedroom units or homes, excuse me, as opposed to one, two and three bedroom, more apartment style units from a size perspective.
Branden Lombardi:
But we think there’s plenty of demand out there for renters looking to live in a more conventional housing setup, but we’re not necessarily as focused on, are we the luxury segment or are we the class A of that?
Branden Lombardi:
I mean, I think that’s where we would slot ourselves if you asked me to put it there. We want to be a class A developer, and that really comes back, again, to the locations, right? So, we’re going to pay more for really well-located land. We’re going to build a bit of nicer home to meet the design guidelines and requirements if we’re in a master planned community.
Branden Lombardi:
But we feel like there is generally a rent premium that we’ve achieved for delivering product in those types of communities in those types of locations.
Dean Wehrli:
Do you think it’s also beyond location? My gut says the next criteria for that is going to be amenities. I was at the IMN conference a little while ago and someone there was saying how, it was a BFR operator. I won’t say who, but how they don’t really need to amenitize and they, I can’t remember exact wording, but essentially had a pretty short term outlook. And I remember thinking that it sounds to me like they’re building the future class C BFR community.
Branden Lombardi:
Sure. And you know what, there’s plenty of demand for people that just want a nice house to live in and they aren’t as focused about the amenities or the resident experience. They want more space, they want more of a home as opposed to the alternative, and they want it to be managed and maintained well.
Branden Lombardi:
I think there is certainly room for that in that in the overall asset class. Our take is amenities are pretty critical. The resident experience is pretty critical. Again, maybe those things rank below location and school district, for sure, for our particular demographic, but not everybody looks for the same things. And that’s why the for-sale housing world or apartments, there’s such a broad range of options.
Branden Lombardi:
And I think build-to-rent really just starts to mirror those other kind of aspects of the residential housing business. And I think there is a focus on it today because it’s so new and what does or doesn’t work. And we’ve done it all ways. And I think, again, in certain locations, do you need to build a 3,500 square foot pool and a fitness center and a dog park if you’re 10 minutes from a downtown area but you’re giving somebody a cool three or four-bedroom townhome? Probably not, right? They’re trading the amenities for the location.
Branden Lombardi:
If you’re in a more suburban setting, people are going to look to have some more of those amenities or services available to them to accompany the home. Right? And so, I think that really is what you see. I think the other thing that is maybe more of a concern is, okay, this idea that all you have to do is build a house and put a for rent sign in front of it today, and you’re in build-to-rent or whatever. And you’re going to probably get 10 people to lease that home up at whatever rate you put out there. But that doesn’t last forever. Right?
Branden Lombardi:
And so, I think that’s where, going back to it, there’s going to be that segmentation occurring and people are going to have to build better product. And also, frankly, because we are lumped all together, my concern is, do we get lumped altogether both for the good and the bad? So, if somebody builds a more basic community and it performs perfectly fine but it’s not highly amenitized or the homes are a little bit more scaled back, does that negatively impact the overall asset class?
Branden Lombardi:
And it shouldn’t at all because that’s not how we view apartments or it’s not how we view for-sale housing, but I think it’s going to take some time for municipalities to know that not all build-to-rent projects are created equal. And that’s a perfectly acceptable outcome, it just needs to be discussed and iterated over time as to, okay, this is more of a workforce housing play, or this is more of a luxury built-to-rent play. And that, I think, will help with some of that too.
Dean Wehrli:
Do you see there being maybe a consolidation here? I mean, how is this space going to change in terms of the players, do you think, over the next few years?
Branden Lombardi:
Well, it seems like now, again, everybody’s jumping in, from the biggest home builders, some of the SFR REITs developing their own build-to-rent channels. And I think the bigger builders will see how they go through it. We have a great part partner in Toll Brothers. They were early to look to partner with us and have been tremendous supporters of their growth and a real critical part of that growth.
Branden Lombardi:
But all the other builders seemly are getting into it. Now, everybody is doing it a little bit of a different way, too, right? Whether it is from a product standpoint or how they’re looking to, are they building 100 home subdivision for rent and just selling it upon completion to an investor that will then own them long term, or are they building out more of their own true build-to-rent team where they’re going to design the community purpose built for build-to-rent, they’re going to build the homes, they’re going to lease it up and manage it, whether it’s in-house or their third party manager.
Branden Lombardi:
So again, a lot of, I think, still to be determined from the investment strategies certain groups employ, and we’ll see how long that takes to play out. But then you’ve got all the smaller players too, right? Like going and buying a 15 or 25 acre site and putting a build-to-rent community on it. Again, whether it’s horizontal apartments, or townhomes, or more conventional product, it is not rocket science.
Branden Lombardi:
And so, I think right now, again, there’s this mad dash to get into the space and become a build-to-rent developer or operator. But again, I think we’ll start to see that settle down over the next few years and you’ll see, again, just like homebuilding, there’ll be the local players that have picked one market and they do a handful of projects, or the regional players.
Branden Lombardi:
There’s going to be the big publics that are volume-driven or are going to try to pump out as many rental homes as possible. And then there’s going to be everybody in between. And BB Living, again, we’re looking to differentiate ourselves from the locations and the product that we offer. That’s our strategy as of today, but that could change down the road too because it’s so new. We’re all still trying to figure this out as we go. Which is the exciting part of it too.
Dean Wehrli:
Yeah. I think that’s a good point too, by the way that you keep on hearing about a lot of the private builders, especially small, private builders disadvantaged with respect to capital and access to capital and cost of capital, et cetera. But you know what? There’s still thousands of small private builders out there. And they’re thriving or a little bit of more little dicier for them often because of those reasons, but they’re still doing great and they’re still out there.
Branden Lombardi:
Sure. Well, and I think that’s another part of this too, is access to capital. There’s a ton of capital today in the equity side. Debt is more readily available today than it was early on for us. That’s always been a bit of a limiting factor, but we’ll see how that continues to evolve.
Branden Lombardi:
But that’s the thing is these projects do take time. You’re educating municipalities, you’re educating the markets and then you’ve got to figure out as much as, like I said, putting a for rent sign in front of a new home and it’s leased up in a day or whatever, that’s the current environment we are going to go through and take our lumps as an asset class. And we’re all going to have to figure out how to continually tweak and improve the operation.
Branden Lombardi:
I think we do a pretty good job of it at BB Living. We also had the head start, and so that’s where we’re trying to continue to take advantage of our first mover advantage or our place in the order. But we’re going to continue to have to improve and figure out things as we go forward too.
Dean Wehrli:
You’re perfect for this question. You’re hearing rumors and anecdotes that a lot of cities are being very leery, they’re being very circumspect about BFR and they don’t fully understand it, even moratoriums. Are you seeing that when you are going out into new markets?
Branden Lombardi:
Sure. Well, again, there’s just that overall stigma about rental product, right? And it’s unfortunate we feel like, again, we can counter it with some pretty good empirical evidence, statistics, information that does not bring down housing values to the surrounding residents. All those things that we all know intuitively but are always brought up.
Branden Lombardi:
I think municipalities, unfortunately, are taking the stance in some locations where it’s like, okay, this only works if there’s real issues with the site and nobody else would want to build something there. Then we’ll approve a build-to-rent project. Or frankly, why does it matter if the housing that is being built is for-sale or for-rent? It doesn’t really change the fact that it’s adding supply to the market.
Branden Lombardi:
If it’s done well, it’s a code. There really shouldn’t be much of an issue as to how it’s owned. If it’s 150 homes owned by one person or 150 homes owned by 150 people, that just seems like a maybe too big… Maybe that’s getting down into the inherent property rights conversation and we don’t need to go there.
Branden Lombardi:
But I think these municipalities are scared that there’s going to be too much of this stuff and it’s not going to be done well. But again, there’s a broad array of housing that is built every day in this country, all across the country, entitlements are getting harder to get. I think we just have to be thoughtful about what we’re building and planning and I think we need to work with these municipalities to understand that this is a viable long-term alternative product, and it comes in many shapes, and sizes, and forms and that they shouldn’t just blatantly say, no build-to-rent or whatever it is.
Branden Lombardi:
Because they wouldn’t say no for-sale housing or no apartments necessarily. I mean, I know there’s municipalities that are more difficult than others to deal with just in general, but the idea that there’d be these broader moratoriums on it, I think, is a bit concerning and will just be another headwind we have to deal with.
Branden Lombardi:
But I think it really is overcome through education in time with these municipalities, explain them to how it works. There are some complexities to it, right? We build a very conventional home, but we’re also willing to build it on a single tax parcel just like a multi-family community, which throws the planners and the city works staff for a loop if, wait a minute, they don’t have lot lines. How does this all work? What do you have to do from a fire perspective or how are you running your utilities?
Branden Lombardi:
These are at slightly higher densities than typical. That complicates utilities, set backs all of those things. And so, again, I think it’s just where you have to be pretty thoughtful and do a lot of that legwork up front with the municipality where you’re looking to acquire land and develop a community and just make sure you know what you’re doing, right? I mean, you got to figure it out.
Branden Lombardi:
And we don’t always have the answers, but we do spend a lot of time on the front end, especially when we’re going into a new market working, whether it’s with the developer initially that may have the good relationship with the municipality or the municipality directly to really tell them who we are, what we’re doing at BB Living, what may separate us from others that they have seen come through the door talking about build-to-rent. And really try to distinguish ourselves a bit, but then also educate them as to what the product is, why we think it’s going to be successful and the things that we’re willing to do to play ball with them, right?
Branden Lombardi:
You’re not going to get a municipality to bend to your whim, it just doesn’t happen. Right? I mean, we’ve learned that lesson. We kicked a lot of stones, and I’ve got the stubbed toes to prove some of these colleagues just aren’t going to bend on some of their rules and standards just because we want them to. Right? It just doesn’t work that way.
Dean Wehrli:
They’ll get there, especially in the big picture, there’s no doubt they’ll get there. It’s just very unfamiliar to them right now.
Branden Lombardi:
Yes. Yeah.
Dean Wehrli:
Branden, this has been great. You’ve been tremendous. I’m going to end this but I’m not letting you off the hot seat in answering one of the most controversial topics in BFR right now – the battle of the acronyms. Are we going to go BFR, BTR, or B4R. Go.
Branden Lombardi:
I think we need some serious marketing dollars to come up with a much better acronym and maybe overall asset class descriptor. So, I’ll plead the fifth on this one or take the fifth. I think somebody brought that up while I was doing a virtual ULI council the other day. And somebody asked if we could come up with a better name for it than build-to-rent or build-for-rent. And I certainly agree.
Branden Lombardi:
I’m not a marketing person, so I would be the wrong person to ask as to what we should call it, but I think build-to-rent’s easy. But again, I think we got to continue to work to educate the industry at large that that’s a very broad term and it’s just like saying housing, right? And so, maybe we can go from that.
Dean Wehrli:
I like the build 4 rent. That’s growing on me now.
Branden Lombardi:
Yeah.
Dean Wehrli:
It’s more interesting.
Branden Lombardi:
Yeah.
Dean Wehrli:
Branden, I thank you so much. This has been tremendous. This has been very, very eye-opening and also just a real good education in the dollars and sense of BFR and where we’re heading.
Branden Lombardi:
Hey, well, thank you for having me.
Branden Lombardi:
I’m really excited to participate in the podcast today. We certainly love what we’re doing over here at BB Living and we’re excited to be part of this growing industry. Whatever we want to call it, we’re excited to have our place in it and really excited about the future for the business.
Dean Wehrli:
Yeah, us too. Thank you so much. This is Dean Wehrli with the New Home Insights podcast. See you next time.
