The boom in single family build-to-rent (BTR) construction projects has been a boon to strapped consumers as well as the construction industry as the nation’s long-standing housing gap continues put stress on American consumers.

Despite uncertainties on the economic horizon, it remains a strong growth opportunity for the construction industry.  But it’s important to understand the specific risks arising from this unique home-building model.

FUELING DEMAND FOR BTR HOUSING

The U.S. ended 2024 still short 3.8 million units of housing needed to meet new household formations and pent-up demand, according to a new Realtor.com report. It would take 7.5 years to close the gap at last year’s construction pace, the organization’s economists added.

The single family BTR sector has been a bright spot in residential construction in recent years. Consumers’ appetite for single family homeownership has shrunk in line with supply and affordability (which has fallen by 38 percent since 2020), as well as the price differential between new and existing homes.

Pivoting to the build-to-rent homebuilder model has become a popular way to meet consumer demand, and to keep homebuilders busy as the traditional new home for-sale market continues to soften in the near term. Over the 12 months ended Nov. 31, 2024, single family build-to-rent housing starts reached 92,000 units, an all-time high as the niche grew to account for 9 percent of all housing starts. In another record, its share of single-family home construction reached 8.1 percent.

The growth trajectory is expected to stabilize in 2025, especially with concerns over how the new administration’s policy decisions may impact global supply chains, construction labor availability, interest rates, and the resulting broader economic disruptions.

DIFFERENT RISKS OF SINGLE FAMILY BTR PROJECTS

Various factors must be considered as these projects—and short and long-term returns—are weighed.

Land prices continue to be high, for example, which can hinder development in regions where demand is the greatest. Once projects are built, the low-density nature of this newer residential model poses unique property management challenges. Delinquencies and vacancy risks may be more challenging for a BTR community than a traditional multi-family complex. Unit costs tend to be higher, putting additional pressure on profit margins. There’s also uncertainty over tenancies as some material percentage of residents may be short-term renters waiting for economic conditions to change so they can buy a house.

A longer-term issue, though, is the project’s potential, long-term vulnerability to long-term risks that must be recognized and proactively managed early. These include:

  • Voiding critical insurance coverage on conversion. It’s easy to imagine BTR properties converted to individual ownership once market conditions improve for single-family homeownership and investors see an opportunity to optimize their returns. But if they haven’t done adequate pre-planning around their respective states’ Statutes of Repose, they may encounter insurance coverage limits or restrictions related to conversion not anticipated when insurance was originally placed.
  • Construction defect risks. Between high interest rates, a surge in construction defect claims, and a boom in pricey custom homebuilding projects, insurance costs are spiking.
  • Heightened class action risk. A BTR project occupied by renters and owned by a single investor is more attractive to insurers, as renters don’t have the standing to form a claimant class. But the risk of class action litigation (arising from construction defects) rises dramatically when the homes are converted and sold to individuals.
  • Property management and ongoing maintenance. Poor asset maintenance and inattentive property management can drive future construction defect claims as well, increasing insurance costs and impairing future asset resale valuations.

3 WAYS TO AVOID CONVERSION RISKS

The challenge is planning out the best strategy for managing a future BTR conversion. Three solutions should be considered.

Sell during the repose period. The surest way to go is to plan at the outset to convert the homes at some point prior to the expiration of the Statute of Repose, and pay a premium for insurance coverage that removes the limitation of conversion. This approach is more expensive, and some will say it’s not their problem as near-term conversion wasn’t planned. However, failing to address that risk can diminish the future resale value for subsequent investors and expose the original investors and builder to uninsured losses.

Look into structural warranties. The traditional builder warranty works like a home warranty. It’s not negligence-based. If something breaks, a deductible is paid, and the insurer pays to fix it. The idea is to closely coordinate that warranty program with a traditional construction liability policy, embedding a risk transfer mechanism that can survive conversion. This allows for continued, if more limited, insurance protection even if the traditional liability insurance is voided due to conversion.

Think about Inherent Defects Insurance (IDI). This type of insurance is a less familiar option in North America that HUB International has repurposed for the unique risks associated with BTR conversions. IDI insurance is common in the United Kingdom and Europe. It’s commonly offered as a coverage extension to traditional builder’s risk policies, and is designed to provide protection against construction defects, including structural failures and resulting damage, after construction has been completed.

 Build-to-rent developments are playing a key role in a housing market that’s under pressure. With the right risk-management strategy, builders and investors can capitalize on this opportunity without exposing themselves to undue risk.

about the author

Kirk Chamberlain currently serves as an executive vice president, leading Top 5 construction insurance brokerage Hub International’s construction practice. Kirk’s background comprises more than 30 years of leadership roles within the construction and large capital projects sector as a broker, risk manager, underwriter, and risk consultant, working with a wide range of public and private contractors, project owners and developers, and their legal and financial advisory teams.  Kirk has led and managed service teams working on behalf of numerous clients in the heavy civil, street and road, general building, residential and municipal infrastructure sectors.