Could Build-to-Rent Be a Solution to Housing’s ‘Missing Middle’ Problem?

Did you know that at the same time many renters navigate a housing market with limited affordable options, new apartment development continues to be held back by World War II-era zoning restrictions? In many localities, regulations introduced in the mid-1940s have choked the multifamily pipeline for decades, creating a “missing middle” that leaves low-income renters in a lurch.

What Is the Missing Middle?

Middle housing (which falls between single-family homes and large apartment complexes) is in low supply in many U.S. cities and suburban communities. Much of its existing stock was built in the 1920s and 1930s before single-family zoning and building requirements for mid- to high-rise apartment buildings made new construction difficult or even illegal in many localities.

Zoning ordinances and other regulatory barriers have historically severely limited the construction of many types of middle housing properties, including:

• Attached Dwelling Units (ADUs) / Detached Dwelling Units (DADUs)
• Duplexes (2 units)
• Triplexes (3 units)
• Townhomes (2 to 16 units)
• Small apartment buildings (5 to 50 units)

A Big City’s Plan to Prioritize the Middle

New York City is one place where the lack of middle housing is readily apparent. So much so that Mayor Eric Adams recently introduced the City of Yes for Housing Opportunity proposal to modernize and update the city’s zoning regulations. The plan aims to amplify the supply of middle-density buildings that remain true to the character of the neighborhoods of the four boroughs outside Manhattan. If enacted, developers would be able to erect 20% larger buildings in high-density areas in New York City, provided the extra units added to the building are set aside for affordable housing. By prioritizing the development of middle housing, communities across the country have much to gain, including:

• Lower shelter costs
• Greater diversity of housing options
• Enhanced quality of life for residents

Middle Housing Residents Represent All Walks of Life

Middle housing is part of the fabric of America. From Millennials to Baby Boomers to multigenerational families, renters from all walks of life gravitate towards affordable housing options that include open spaces and amenities.

As Millennials start families, this type of housing is not widely available at their price point. With the cost of homeownership higher than ever, Millennials have been finding out firsthand what it means to be in the missing middle. Similarly, Baby Boomers and multigenerational families are increasingly caught within this housing divide.

In many communities, the options for affordable places to rent are limited due to decades of low development with nearly one-fifth of multifamily properties now over 65 years old. As a result, the demand for quality rental housing in the U.S. continues to far outpace available supply as a drop in multifamily starts this year has weakened the pipeline.

Closing the Missing Middle Gap

Following decades of restrictive policy, middle housing continues to have a diminished presence within the U.S. housing ecosystem. In the second quarter of 2024, there were only 3,000 construction starts of 2- to 4-unit properties, in line with the previous year’s tally, according to the National Association of Home Builders.

As U.S. renters navigate a market low on quality options, the development of single-family build-to-rent (BTR) communities has begun to plug a long-existing hole in the housing market. New purpose-built communities not only increase supply but also give operators the opportunity to attract a wide range of residents who require different types, styles, sizes, and prices of housing. BTR units are generally in master-planned communities with shared amenities, such as clubhouses and pools.

BTR Investment Increases as Demand Grows

Nationwide, BTR communities are piquing the interest of renters, developers, and investors. Millennials and empty nesters have heightened demand for comfortably sized BTR units that afford access to lifestyle amenities. With the current supply of quality rental housing woefully inadequate, developers and investors are busy building. Single-family rental (SFR) housing starts continue to hit all-time highs, totaling 83,000 units over the 12 months ending in June 2024. BTR now accounts for 8.1% of all single-family housing starts.

The expanding BTR sector keeps attracting greater levels of investment due to its focus on new construction, its operational efficiencies, and rent growth potential. BTR rents have typically shown great strength, surpassing average multifamily rent growth, especially in major metropolitan areas.

During the 12 months ending in March of this year, there were 80,000 BTR construction starts by unit count, another new high, according to Arbor’s Single-Family Rental Investment Trends Report. On the heels of a record-breaking 2023, a sustained surge in the development of purpose-built communities could one day bring the missing middle to the fore of the U.S. housing ecosystem.

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For more than 30 years, Arbor has helped multifamily and commercial real estate borrowers reach their financial goals. We are committed to building long-term relationships with our clients that are mutually beneficial. Arbor has a diverse suite of loan programs available to strong sponsors, including single-family rental portfolio financing and build-to-rent financing products.

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About the Author

Tres Seippel, MAI, MRICS is Director, Construction Management, at Arbor Realty Trust, a national direct lender and REIT that provides debt for multifamily, single-family rental, and build-to-rent properties. He exclusively funds BTR and SFR deals throughout the U.S. and focuses on the sponsor’s capabilities, the project’s marketability, and the overall financial feasibility.

Interested in the multifamily real estate investment market? Contact Arbor today to learn about our array of multifamily, single-family rental, and affordable housing financing options or view our multifamily articles and research reports.