New Construction as an Investment in Community and Returns
As real estate investors (REIs) gear up for another year ahead, new construction investments provide an unexpected advantage within a challenging and fluctuating market. In fact, according to a 2024 housing market outlook survey conducted by John Burns Research & Consulting, for-sale home builders are the most optimistic about their three-year outlook on housing through 2026 compared to respondents from private equity firms and professional services.
Amid stretched housing affordability and a historic lack of available housing stock, new home construction is often seen as a sign of gentrification that could displace current and longtime residents by causing housing costs in an area to rise. But new evidence suggests that the opposite is true—a new supply of for-rent homes from builders may actually open more affordable housing opportunities and potentially drive down rental rates through infill construction.
This emerging trend isn't just about building homes. It's about reshaping communities, offering affordable living solutions, and creating lucrative opportunities for investors.
Driving down rents through increased supply
A fundamental economic principle is at play here—supply and demand. For years, many regions have grappled with housing shortages, leading to skyrocketing rents. New construction is the light at the end of this tunnel. By increasing the housing supply, we're beginning to see a much-needed relief in rental prices. This doesn't just benefit renters. It also stabilizes the market, making communities more accessible and diverse.
The reason for this is two-fold. First, the cost to rent is presently far less than the cost to own in most markets. Given the continued "lock-in effect” of homeowners holding onto lower fixed mortgage rates, it's unlikely that a surge in supply for for-rent or for-sale homes will emerge any time soon, which means developers must literally build a way out of the country's undersupply of homes.
The other part of this equation is a strategic shift in construction to focus on modest starter homes, which are built on smaller lots using cheaper materials like vinyl and carpet instead of pricier hardwood and granite. Location is also a factor, as markets like Florida, Texas, and parts of the Midwest offer more REI affordability.
Giving buyers what they want: move-in ready homes
Gone are the days when buying a home meant inheriting the problems of the previous owner. New construction homes offer move-in-ready solutions, appealing to the modern buyer's desire for convenience and efficiency. These homes come with the latest designs, energy-efficient appliances, and smart home technology to meet modern demands and expectations. For first-time buyers, this is a game-changer, simplifying the transition to homeownership.
Given the low inventory in the resale market, many single-family rental (SFR) investors are choosing to partner with builders to purchase finished products in build-for-rent communities and areas that drive job and population growth rather than build individual homes for homeowners. New construction resonates with a wide range of buyers, from millennials looking for smart, sustainable homes to baby boomers seeking comfortable, low-maintenance living.
Investments that transform communities and yield returns
New construction opens up diverse investment opportunities, from single-family homes to multi-unit properties, that help shape the character of emerging neighborhoods and drive the potential for high returns as these areas develop. Think beyond building houses—it's about crafting communities that prioritize green spaces, community interaction, and sustainable living.
This holistic approach to community building fosters a sense of belonging and contributes to the overall well-being of residents. It's not just an investment in real estate. It's an investment in the future of our neighborhoods.
The environmental impact of new construction homes can't be overstated, and the benefits extend beyond the housing market. Modern building techniques and materials are notably more energy-efficient, sustainable, and technologically advanced, reducing the carbon footprint of new homes. This is not just a trend; it's a commitment to a greener future, appealing to an increasingly eco-conscious buyer base.
Additionally, new construction is a significant job creator among multiple industries, from construction to real estate services. It stimulates local economies as new residents bring demand for local businesses and services, creating a ripple effect of regional growth and prosperity.
Saving time, money and local communities with infill construction
Infill construction capitalizes on unused urban land, transforming gaps into housing that complements the neighborhood. It's an investment strategy that conserves resources and benefits communities.
Not only is this great because the majority of infrastructure is already in place—think roads, water and power lines, and buses or trains—but this kind of development can revitalize older areas, decrease urban sprawl, and increase foot traffic, which is great for the local economy.
Infill construction tackles urban housing shortages by adding affordable homes and leveraging existing infrastructure for cost-effectiveness and simpler logistics. This approach can also enhance ROI potential in developed areas.
Getting these projects off the ground takes a lot of planning, managing, and talking with local authorities and the community. It's all about teamwork to make sure these projects are approved and turn out great, and infill construction loans allow developers to secure financing specifically for these kinds of projects.
If you’re interested in investing in new construction, you’ll want to first check with the city's zoning officer to ensure your potential project fits within the zoning laws of the area. Make sure to connect with the city's building department early on to start a conversation about the process and how to get plans and permits approved. Work with a general contractor to help develop plans and a detailed scope of work, and don’t be afraid to speak with several general contractors to get multiple bids.
Be mindful to avoid "over-improving" a project by attempting to build the biggest and best home in the neighborhood. When you’re just starting out, median-priced homes are a better bet. And finally, don’t forget to get in touch with your lender early in the process to learn about their requirements for liquidity, down payment, and more.
As we look ahead, it's clear that new construction is more than just a trend. It’s poised to be a pivotal force in the 2024 real estate market, addressing key issues like housing affordability and sustainability while providing exciting opportunities for investors and homebuyers alike. This year, we're not just building homes—we're building the future of living.