Developers are building new houses for rent at an unprecedented rate, aiming to capitalize on the steep home prices and higher mortgage rates that are forcing many Americans to keep renting.

In 2023, 93,000 new single-family homes for rent were completed, according to estimates from housing consulting firm John Burns Research and Consulting. That was 39% more rental homes than in 2022, and the most in any year ever. The breakneck pace is poised to continue this year before easing by 2025.

New rental houses built annually in the U.S.Source: John Burns Research and Consulting

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New rental homes come in all shapes and sizes, from one-bedroom cottages to five-bedroom spreads with big backyards. Some are townhomes, others are detached houses. They are sprouting up especially in outer-ring suburbs of Arizona, Texas and Florida cities, and in other places with fast population and job growth.

While rent growth has slowed from its double-digit-percentage pandemic peaks, rents for houses are still trending higher than those for apartments, according to JBRC. Occupancy, which has been slipping in multifamily buildings, has also been more resilient in the rental-house sector, indicating more sustained demand.

Rental builders are betting that the lowest level of home affordability since the 1980s means that even relatively affluent Americans will remain renters, squeezed by near record home prices, mortgage rates above 7% and other rising home-related costs. A large number of people also simply prefer to rent a house, builders say.

In Paso Robles, Calif., real-estate developer STG Capital Partners is building more than 200 two- and three-bedroom rental duplexes. Monthly rents will range from $3,000 to $3,700, while the median home price in the Californian town is about $700,000.

“We’re comfortable with that market because there haven’t been any large projects built there in years,” said Rand Sperry, STG’s managing partner.

After last year’s record levels, another 99,000 new rental homes are under construction this year. Plans for new projects have slowed, however, as lending conditions have tightened. Many homes that are in the planning stages won’t get built because of the lender pullback that is also undermining multifamily construction, analysts and builders said.

New rental homes are sprouting up especially in outer-ring suburbs of Arizona, Texas and Florida cities. PHOTO: DESIREE RIOS FOR THE WALL STREET JOURNAL

Even so, many builders expect any construction dip to be short-lived. “This isn’t going away,” said developer Richard Ross, whose Quinn Residences broke ground on about 300 new rental houses in Canton, Ga., this April.

And many investors remain bullish on the sector. Chicago-based asset manager Heitman this month launched a $235 million partnership with builder Crescent Communities to construct new rental homes across the Sunbelt.

“We expect a growing number of older millennials and retirees to rent as median home prices have grown at twice the pace of median incomes since 2000,” Heitman executive Brian Pieracci said.

Nationally, rents for both apartments and houses rose more than 20% during the pandemic years. As of 2022, the median American renter spent 31% of his or her income on housing, according to Harvard University’s Joint Center for Housing Studies, a share of income the federal government considers cost-burdened.

But home sales prices and mortgage costs have risen even faster. In March of this year, the average monthly mortgage payment had ballooned to 38% more than the average monthly apartment rent, according to a report from brokerage CBRE.

In March of this year, the average monthly mortgage payment had ballooned to 38% more than the average monthly apartment rent. PHOTO: DAVID RYDER/BLOOMBERG NEWS

Rents for new houses often fall somewhere in between. Many builders see the most opportunity in places low on rental supply. Even in places that have seen a large increase in new supply, developers have been able to keep rental houses mostly full and have enticed new tenants with concessions such as a month of free rent when needed.

Josh Hartmann, chief executive of rental builder NexMetro Communities, which has 12 projects under way across the Sunbelt, said the record new supply of houses for rent in Texas caused vacancy to go up and rent growth to drop at his company’s properties.

But so far this year more tenants are choosing to renew their leases rather than move. “We are seeing a lot more stickiness right now,” he said.

Though purpose-built rental communities are flourishing, large landlords that snap up older homes and convert them into rentals have come under increased scrutiny by lawmakers, who say these companies make it harder for families to become first-time homeowners. Some of these companies have partnered with home builders to build new rental homes, rather than just buy existing ones, a move they say is aimed at addressing housing shortages.

“The optics of it from a policy standpoint are better,” said Rick Palacios, director of research at JBRC.

Publicly traded landlord Invitation Homes, for example, recently went into contract to buy 500 homes being built in Charlotte, N.C.; Nashville, Tenn; and Jacksonville, Fla.

On a recent earnings call, Invitation’s chief investment officer, Scott Eisen, said the company’s involvement in the new-construction market encourages builders to build more homes than they would otherwise.

“They might only start a 200-home community, but with us as their partner, they might start a 300-home community,” Eisen said.