AREP Enters Build-To-Rent Market With 200-Unit Virginia Townhouse Project

American Real Estate Partners is wading into the build-to-rent market as it sees expanding opportunity in the asset class.

The McLean-based real estate firm announced Monday it purchased a 200-unit, under-development townhome community near the end of Metro’s Silver Line in Ashburn for $120M, a partnership with GreenBarn Investment Group. 

AREP co-founder and President Brian Katz told Bisnow in an interview Monday that the build-to-rent model will be an "important" part of the firm's strategy going forward, as it sees an "oversaturation" of traditional apartments. 

"You've got move-up buyers, who would traditionally go from apartments into townhomes or single families ... who now can't afford to go buy these townhouses," Katz said. 

“And so what we see is an opportunity to take what is typically a move-up buyer and turn them into move-up renters,” he added. "It's just a logical progression of the rental experience."

With rising interest rates and inflation putting pressure on potential buyers’ wallets, Katz sees the asset class as a solution for people who want more square footage and outdoor space but can’t afford to buy.

“We started to analyze this as we saw mortgage rates moving up. Because it's a natural extension, if you think about what happens as a result of significant increases in mortgages,” he said. 

Of the 200 units planned at AREP's CityHouse Ashburn Station project, 26 are complete, with the remaining 174 set to deliver within the next 15 months.

The homes will average 2K SF. The development will feature amenities including sports courts, outdoor community green spaces, pet-friendly facilities and indoor/outdoor entertainment areas, according to the press release. 

AREP said its project is fully financed. It partnered with GreenBarn Investment Group as a co-general partner to purchase the subdivision from Dream Finders Homes. Rithm Capital Corp., GreenBarn's parent corporation, provided an $86.4M acquisition and construction loan through its Genesis Capital subsidiary.

The acquisition is one of the last in AREP's Fund III, which launched 18 months ago.

The single-family-rental industry is most active in Midwest markets like St. Louis, Pittsburgh and Kansas City, where 60%, 59% and 55%, respectively, of all rental units were SFRs in 2022, respectively, according to a CBRE July report. Meanwhile, the D.C. market is one of the least active areas for the asset class, according to the report.

AREP is focusing its build-to-rent prospects around its existing operating footprint along the East Coast. It is also honing in on townhome assets closer to urban areas, a trajectory on which Katz said the sector is headed.

“The traditional single-family rentals, those have been out there for a long, long time," Katz said. "And now you're starting to see them in more urban core,  suburban locations in townhomes. So I think it's a trend you're going to continue to see that’s built out."

Loudoun County, where AREP's project is located, is seeing one of the strongest office markets in the region, while at the same time, retail and multifamily developments are moving forward around the newly extended Metro line. 

“This plays in that middle space, where you’re suburban but you're still really close to the city and close to where people work,” Katz said. 

The build-to-rent market accelerated in recent years. Transaction volume for the asset class in 2021 and 2022 averaged 250% higher than the preceding five years, according to CBRE’s July report. 

The number of units under construction peaked in Q2 2022, with 39,000 units in the works, according to U.S. census data. It stabilized to 35,500 at the end of last year, but that number is still well above the 13,000 units under construction in the quarter leading up to the beginning of the pandemic. 

“This is an important component of what we're going to be doing going forward," Katz said. "It’s not just developing multifamily communities or conversions from office to rental, but built-to-rents are a significant strategy inside our residential group."