The ROAD ahead for build-to-rent

The build-to-rent (BTR) industry can finally breathe a collective sigh of relief after the passage of the 21st Century ROAD to Housing Act ended months of legislative uncertainty. 

This development is a win for the industry. But questions remain about how much uncertainty still looms over future legislation and implementation, how quickly BTR can recover the ground it lost, and where investment and demand go from here. 

The final bill removed provisions from an earlier Senate version that would have denied BTR communities an exemption from the institutional investor ban. It also would have imposed a seven-year sell-off requirement on new BTR developments. 

These provisions, added at the last minute to an earlier Senate version of the bill in March, largely froze capital investment in new BTR projects. That’s because the regulations would have made it difficult for investors to generate a return on their investment. 

“It really completely shut down the market, and most of the pipeline basically stopped. As a developer, it was difficult, because if you’re going to buy land, you have a certain timeline by which you have to buy that land,” Alex Chalmers, managing partner at Material Capital Partners, told HousingWire‘s TBD. 

“The land sellers aren’t going to extend it. They just want to sell their land, right? They don’t care if it goes to a BTR community or whatever else. So that was a real pinch point, I think, for a lot of people, and it really cut off a lot of the new project pipeline.”

Now that this legislative uncertainty is largely resolved, capital is now beginning to flow back into BTR projects. But questions persist over how quickly the industry can make up lost ground, how the Department of the Treasury will interpret the law’s exemptions and what the future outlook holds for the industry.

Renewed optimism

With the potentially harmful provisions stripped from the final text of the bill, investors feel comfortable placing capital in BTR communities once again, Chalmers said.

In his experience, investor sentiment remained mixed until the Senate passed the bill on June 23. Since then, investment has started flowing back into the sector as investors became more confident in the bill’s fate. While it could take a few months for the industry to make up for lost ground, Material Capital Partners can already feel the positive effects of the bill’s passage. 

“At least for Material Capital Partners, we have a number of projects — probably at least five — that are able to go forward now, and that’ll create close to 1,200 new housing units just in the next 18 to 24 months.”

Tony Julianelle, CEO of Atlas Real Estate, a company that purchases and manages BTR communities, argued that investors never abandoned the sector. Instead, capital simply sat on the sidelines until there was more certainty. 

“I think everybody anticipated that this would get resolved,” Julianelle said. “I don’t think there are a lot of investors who just said, ‘Oh, you know what? No more built-to-rent, no more single-family, we’re just going to go buy self-storage.’ I don’t think there were a lot of people who said, ‘Let’s fully reallocate.’ I think it was more, ‘All right, hold on a minute, let’s see what happens.'”

Now, with the wait-and-see period over, many investors, developers and operators are working with restored confidence. 

“Build to rent is here to stay. It’s going to be a meaningful way to meet housing demand, and the capital is now in play, for sure,” Julianelle added. 

Lingering uncertainty

While the bill’s passage introduced short-term clarity, it may have introduced new questions. To understand why, it’s worth examining how the institutional investor ban is worded.

Section 1001 of the bill, titled “Home-ownership for Main Street America,” defines single-family as traditional detached and attached single-family properties, as well as duplexes. Manufactured housing is omitted from the definition.

The section explicitly states that “no large institutional investor may purchase, or enter into a contract to directly or indirectly purchase, any single-family home” that aligns with this definition. 

The law’s exemptions largely pertain to new supply while banning the acquisition of existing homes. Purchases exempt from the ban include newly built, renovated or converted homes sold outright by an investor; homes built or bought under build-to-rent or renovate-to-rent programs; homes tied to homeownership or rent-to-own programs; and homes in 55-and-older communities. Purchases from another compliant institutional investor are also exempt. 

Section 1001 mainly targets individual purchases in for-sale communities, a practice that is not very common. As a result, the ban generates far more headlines than it does actual market impact.

“Most of the institutional investors have frankly gotten out of the market of buying up existing homes that they can rent. … At least with the folks that I work with day in and day out, I don’t think this really has an adverse impact on them,” said Cameron Cosby, a partner at Sullivan & Worcester and a tax attorney who works with large institutional investors and real estate investment trusts (REITs). 

But to discourage firms that already own at least 350 single-family homes from buying more nonexempt properties, the legislation would levy a “civil penalty in an amount that is not more than $1,000,000 per violation, or 3 times the purchase price of the property involved, whichever is greater.”

The Secretary of the Treasury, or the Attorney General at the request of the Secretary of the Treasury, is permitted to levy this penalty on a large institutional investor that violates this provision. 

Giving Treasury this power may not seem like a big deal in and of itself, since BTR is exempt. But there is also a risk that Treasury’s regulatory authority could broaden over time, or that the federal agency could choose to interpret and apply the bill’s language in a manner that departs from Congress‘s original intent.

“The fact that there’s now an act in place that empowers Treasury to broadly make rules means that your industry can now be impacted by each administration’s desire to do rulemaking,” Julianelle explained. “Treasury now gets to make rules. Well, they can adjust those rules whenever they see fit, so you have to keep in mind that there’s some risk around that.”

Advocacy efforts continue

On July 14, a coalition of trade organizations — including the National Multifamily Housing Council (NMHC), Mortgage Bankers Association (MBA), National Apartment Association (NAA), National Association of Home Builders (NAHB), National Rental Housing Coalition (NRHC) and Nareit — submitted a letter to the Treasury to request clarification on this very concern. 

The coalition is concerned that ambiguous statutory language could be misread to also sweep BTR communities into the ban, even though they argue that BTR was clearly exempt. The letter requested that the Treasury quickly clarify that it will uphold the intent of the legislation, which is to ensure that BTR isn’t adversely affected. 

“To ensure BTR investments can move forward and help spur housing supply, we request that Treasury signal its intention to issue regulations consistent with this view and subsequently issue such regulations. This will unlock and unleash the BTR market so that it can continue to play an integral role in fostering housing supply and ensuring all Americans have a safe and decent place to call home,” the letter read. 

Owen Caine, NAA’s assistant vice president of federal legislative affairs Vice President of Federal Legislative Affairs, said in an interview that the letter is aimed at giving the BTR industry some much-needed clarity. 

“[The bill] did still leave some discretionary work for the regulatory space, specifically in Treasury, to make certain definitional determinations. You can argue whether it’s easier to make those definitions in Congress or in regulatory actions, right? It’s all the same work and the same conversation,” Caine said. 

While there is still work to be done, NAA and other rental housing groups indicated that they are pleased with the final version of the bill. 

“If no one is completely happy, that’s a sign of a good piece of legislation in my mind. There’s always a give and take, and there are always things that have to be worked out post-mortem on these things,” Caine added. 

The future of BTR

On one hand, some industry insiders argue that the months-long uncertainty generated by the 21st Century ROAD to Housing Act — and the threat of future legislative uncertainty — could keep some investors away from the industry. 

There’s also the fact that the bill added in some extra layers of compliance, including the establishment of a Renter Outreach Resource for tenants living in single-family homes owned by institutional landlords.

Under this federal program, renters of institutional investor-owned homes can report federal violations to the Department of Housing and Urban Development (HUD), and the federal agency is then required to investigate them. Institutional investors, in turn, must inform their renters about the program and maintain a dedicated website, among other requirements. 

“It doesn’t necessarily restrict what institutional investors can do, but it’s just an additional bureaucratic headache for them to have to deal with,” Cosby explained. 

But others in the industry argue that restrictions on other forms of single-family rentals could push more institutional capital toward purpose-built BTR communities. 

What’s indisputable, though, is that BTR has been gaining traction for many years, particularly since the onset of the COVID-19 pandemic. Estimates from Arbor Realty Trust and Chandan Economics show that BTR accounted for about 4% of all single-family rentals in 2021. By 2024, that share rose to a peak of 9% before sliding down to 7.2% last year. 

Part of this correction stems from the fact that BTR is concentrated most heavily in the Sun Belt, a region that has seen a broader construction slowdown over the past couple years after a post-COVID building boom left an excess of new supply. 

George Ratiu, vice president of research at NAA, noted that despite the recent correction, the sector’s growth trajectory points to continued strong investor demand in the near and long term alike.

“There are people who need housing that is hard to find on the for-sale side, and sometimes if they have kids or they want a different school district, a single-family rental is a much more attractive option,” Ratiu said.

“The economics here speak quite loudly. Demand for the single-family rental home remains viable and quite strong. I expect that … investors, with more clarity that the bill offers, are going to return to the market.”