It was 10 years ago when Lafayette developer Bryan McLain says he saw a trend coming.
The Cottages at Southpark, which is billed as Louisiana’s first exclusive rental home community, opened in 2012 with 42 single family homes for rent along Youngsville Highway near Broussard. Three years later he opened The Cottages on East Broussard, which feature 93 homes for rent in a gated community across town with all the amenities found in an apartment complex.
He opened a third in Lake Charles, and all three have since sold, the most recent one for nearly $20 million. Now McLain is continuing to pursue the same business model — he has two projects in the Houston area with nearly 300 units planned and will soon close on 16.5 acres near Milton to build 110 single family rental units possibly by late next year.
Why so much activity? Because single family rental properties — often called horizontal apartments — are the hottest trend in real estate in the U.S. and could offer options to would-be buyers getting squeezed out of an escalating housing market.
“The single family rental space is the hottest space in real estate,” McLain said. “It’s growing exponentially, way faster than any other market. We felt like (in 2012) it was a good place to put our money. We’ve seen it become so red hot it’s hard to hold on to them right now.”
Many who follow the home construction industry saw this trend coming at the beginning of the year. While construction has increased 3% year over year, it spiked 16% in the third quarter of 2021 as a result of a runaway real estate market with increased prices, higher mortgage rates and dwindling inventory.
Across the country there were 13,000 new single family rental homes in the first quarter of this year, a 63% increase from a year ago, according to the National Association of Home Builders. Homes built to be rented still represent only 5% of the market, but that’s nearly double the historic average.
In Lafayette, single family homes available for rent are nearly nonexistent. Among the 530 properties managed by Keaty Real Estate, at one point in mid-May only 16 were available, property manager Amy Green said. Several landlords over the past two years got out of the rental business and sold their properties, shrinking the supply of properties.
“(That) is probably the most we’ve had on the market at one time in the last 12 months,” Green said. “A lot of property owners have taken advantage of the sale market and sold their rental properties. That makes the most sense right now. The demand is so large in one particular price point that you can’t keep houses in that price point. Your supply is down, so your price is going to increase.”
What is fueling the trend is rising property values along with rising interest rates on a typical 30-year fixed-rate mortgage. Two years ago, when rates dropped well below 3%, the market was flooded with buyers, which eventually drove up prices. Last month the average sale price of a home in Lafayette Parish topped $300,000, according to data from Bill Bacque with Market Scope Consulting. In June 2017 the average home sold for under $220,000.
The average rate for a 30-year fixed-rate mortgage is now hovering just below 6%. Costs in home construction have also pushed prices upward, all of which will have many would-be homeowners squeezed out of buying a home and into the rental market.
“I think the lower-income range, it’s going to push a lot of those buyers out of the market,” said Robbie Breaux with EXP Realty. “To me it almost feels like you’ll see something similar to California where you don’t see anything for $200,000 or under anymore. That may be a wild hypothesis. If that happens, I don’t know. It’s just bananas, man.”
Why they’re popular
Single family rental developments are popular, developers say, because renters have all the luxuries of an apartment complex without having to share walls or having an upstairs neighbor. At McLain’s former properties, renters can park their cars in a carport, have their lawn maintained and have access to a pool and business center.
One now offers premium services, including dry cleaning services and pharmacy delivery.
Bearing Point Properties of Baton Rouge announced last week plans to build 146 units in the 4400 block of Chemin Metairie Parkway in Youngsville. The development will be gated and feature a greenspace, a park area, a gazebo, a grilling station, a fitness facility and a business center.
“With the younger generation, a lot of them have never picked up a weed eater or know how to run a lawnmower,” McLain said. “They really like it. They can come and go and everything is taken care of. With COVID, it exasperated a lot of that. People didn’t want to get on shared elevators and they wanted their space.”
Rents, however, will run higher than the typical rent for an apartment. The Youngsville development will feature homes between 1,200 and 1,500 square feet that will rent between $1,700 and $2,100 a month. A three-bedroom unit at Cottages at East Broussard is listed for $1,825 a month.
“Typically high growth suburban markets are demanding this type of product,” said John Buzzell, partner with Bearing Point Properties. “It’s for the person that is looking to rent instead of buy. Pre-pandemic, this was a product type that we’ve only been seeing on the west coast. It’s been making its way through the rest of the country, and we’re starting to see it along the Gulf Coast.”
Developers Jordan and Robert Daigle, the developers behind the large West Village project in Scott, are expected to close next week on 40 acres along Town Center Parkway just west of Target Loop for a project that could include a mix of more than 100 homes each for purchase and for rent. The Daigles say they are committed to rental properties and even turned down offers to sell the rentals planned for West Village.
Rentals will go for $1,200 and $2,000 a month, while the homes for sale will be priced at $165,000-$225,000.
“Nobody can buy new construction under $250,000-$260,000,” Robert Daigle said. “I don’t care what size. Some people don’t need big houses. I think that product is going to be a huge seller and we can address the huge needs for people that don’t want to own and want to lease.”
Is it better to rent?
Ashley Mudd and her wife, Brooke, sold their starter house in Lafayette back in January, with hopes of eventually being homeowners again. But getting back into home ownership has been challenging.
They made offers on three properties. On two of them, things got competitive. There was a bidding war on a backup offer on one. One house they didn’t make an offer on, the seller wanted the buyer to offer an appraisal guarantee — meaning the buyer would cover however much less the house was appraised for.
Now they will move into a month-to-month apartment in Lafayette while still looking for a house.
“It feels like it’s starting to dry up,” said Mudd, program director for Reaching Out MBA. “In the past two weeks, we went from every day we’d be seeing new listings and trying to get a showing to anything that’s listed is the stuff that’s been sitting there. We haven’t seen anything getting added in the neighborhoods we’ve been looking. We’re a lot more open to getting something not move-in ready, which is not what we wanted going into it — but we do now.”
New construction and overall inventory has dipped in Lafayette Parish, which had its biggest year-over-year decline in sales since interest rates first plummeted two years ago. Among new listings in June, new builds are down 20% and overall properties hitting the market were down 18%, Bacque’s data shows.
As interest rates continue to climb along with property values, sales are likely to drop even more. When interest rates climb, buyers qualify for 10% less, meaning if rates go up 2.5%, what the typical homebuyer can afford to purchase drops 25%.
“That’s significant,” Bacque said. “And and as fewer people exit (rental properties) to buy housing, what’s going to happen to the demand probabilities on rents? They’re going to increase.”
The national median rate for a rental property — which includes apartments — in June was up 14% year-over-year but less than 1% from May, according to national real estate company Redfin. In Lafayette, the median rental rate is up 22% since March 2020, according to apartmentlist.com, which monitors rental rates across the country.
The area would benefit from more rental homes, especially any three-bedroom homes in the $800-$900 range, which is the highest demand, Green noted. But any additional units may only make a slight dent in the problem.
“I don’t think this problem is ever going to be solved,” Green said. “Lafayette is still growing. You can bring in new developments, and it’s definitely going to assist in the need. When you’ve people coming in from all different areas, you’re never going to have enough houses to fill the need.”