Taylor Morrison is the latest big homebuilder to bet on single-family rentals

Real Estate

Sheryl Palmer, CEO, Taylor Morrison Home Corp.

Scott Mlyn | CNBC

It didn’t take long, but the build-for-rent space is starting to get a little crowded.

Scottsdale, Arizona-based Taylor Morrison just announced a partnership with Christopher Todd Communities, also based in the state, to build single-family, rent-only communities. It’s part of a trend of builders stepping in to the single-family rental space, either on their own or partnering with established rental companies.

Lennar and Toll Brothers have recently started building homes for rent. Lennar sells its properties to investors, while Toll plans to hold the properties in partnerships.

As for Taylor Morrison, the first projects will be in joint ventures, but then it will take over the construction process — acquire land, develop it and eventually build in excess of 2000 single-family homes in rent-only communities. Christopher Todd will design the communities, hire property management and lease the homes. It will all be according to the company’s own time-tested “playbook,” which determines supply-demand characteristics, and then gauges the right submarkets, community design and amenities package.

Three developments are planned in the Phoenix area, breaking ground late this year. The expectation is then to expand over the next several years, bringing more rental communities to more markets.

Taylor Morrison’s CEO, Sheryl Palmer, said she expects to sell the homes to investors initially but might consider other options over time.

“We’ll determine the right time in the lease-up process to sell the assets. There is plenty of money out there, so we could look at a REIT or private investors, but our intent will be to divest in a pretty timely fashion,” said Palmer. “As we look at the best way to optimize price and returns, it might be to do something on our own and create our own fund or REIT, but sell them out of the Taylor Morrison land portfolio.”

Demand for single-family rentals is incredibly strong, as home prices soar and social stigmas around renting fall away. Vacancy rates are low and rents are rising. Half of Christopher Todd’s current tenants are millennials and half are baby boomers, according to Palmer.

“The profile of consumers in Christopher Todd shows that these are not people who can’t afford to buy, they choose not to buy,” she said.

Nearly the same words were echoed by Mark Wolf, founder and CEO of AHV Communities, which is building single-family rental homes in gated communities in Texas.

Wolf, however, is holding the properties, rather than selling.

“We believe in the long-term cash flow game. So if you hold these properties for 10-plus years, or even seven-plus years, the residual cash flow is worth more than the sale one time,” said Wolf.

For Taylor Morrison, Palmer told investors in the company’s quarterly statement that the strategy aligns with the company’s focus on affordability and flexible living.

“What’s more, this strategy will allow us to further increase the velocity of community deliveries and we expect to enhance our time and cost-efficient production process with proven and standardized specifications and a concentrated production line building process creating a rapid land-to-lease-up pipeline,” she said in the statement.

She also said it’s a great way to turn renters into Taylor Morrison homeowners.

“We absolutely … plan to market to this asset class about Taylor Morrison new communities in the area,” Palmer said.

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