A chaparral-covered patch of land in southwest Riverside County could soon become a testing ground for a new housing concept.

Developers plan to build 163 townhomes on the south Wildomar site, each equipped with its own two-car garage, a private front porch and a balcony.

But once they’re built, the homes won’t be put up for sale. They will all be rented out.

While such “build for rent” single-family projects have become increasingly popular in other parts of the nation, the concept is still a novelty for California, where high land prices, low yields and a long, difficult approval process make low-density rentals too risky and costly.

Longtime analysts are skeptical the Inland Empire experiment holds big promise, even in house-hungry California. A stagnating population, the ever-present threat of anti-developer litigation and the looming risk of rent control are just some of the reasons why the Wildomar bet could end badly, they say.

But Marcus Cook, the managing partner for project developer Sancerra Communities, thinks he’s found the secret sauce for making such homes feasible in the Golden State. A good location, near jobs and retail, in a good school district is key, he said.

If the plan succeeds, Sancerra will be joining a trend that’s raging across the U.S.

RELATED Q & A INTERVIEW: Millennials driving demand for single-family rentals

Wall Street and institutional investors — immersed in the mom-and-pop world of rental houses since the end of the Great Recession — can’t buy enough existing homes to meet the surging demand created by millennial renters, project developers say. So, they’re buying newly built subdivisions or building rental houses from scratch.

As millennials age, the nation’s biggest demographic cohort is looking for more space for their pets and growing families. As one developer put it recently, they’re looking for a home with “a private backyard and a doggie door.”

And since many lack the means to buy a house, investors are finding ways to lease out the American dream.

“It’s really a Class A, luxury living lifestyle,” said Todd Wood, CEO of single-family rental developer Christopher Todd Communities.

Maryland-based real estate consulting firm RCLCO recently estimated 2.5 more million single-family rentals will be needed during the next decade to meet growing demand. Yet, converting existing houses into rentals will only add about 728,000 homes to that supply based on current, record-low foreclosure rates, the firm said.

“(Millennials) are starting to form households. They’re starting to get married. They’re starting to have the financial independence to move out from living with their parents, and (they’re) at a life stage where they’re starting to have children,” said Sancerra’s Cook. “And you need more space than a studio apartment in an urban location.”

Rise of the renter

Growing demand stems from the growth of rentership over homeownership.

The number of renter households increased 11% nationally from 2010 to 2019, compared with a 5.1% increase in homeowner households, U.S. Census figures show.

In Los Angeles, Orange, Riverside and San Bernardino counties, rentership increased 8.9%, vs. a 2.5% homeownership gain.

The number of attached and detached rental houses has seen similar gains, rising 8.9% over 10 years to just under 15 million units nationwide in 2019. In the four-county Southern California region, the number is up 3.2% to almost 854,000 rental houses.

When you include townhomes and row houses, as many in the industry do, the number of single-family rentals rises to about 22 million in the U.S., RCLCO estimated.

While millennial homeownership rates have increased in recent years, those in the 25- to 40-year-old age group still lag the national average, Freddie Mac reported this year. As of 2019, 43% of millennials were homeowners, vs. a national average of 65%.

Delayed marriage, less financial security and higher debt contribute to lower homeownership rates. “Today’s millennials are mostly renters,” the Freddie Mac report said.

Millennials entering the prime home-formation years are “driving a surge of demand for larger rental units to accommodate families,” Todd LaRue, a managing director in RCLCO’s Austin office, wrote recently. And that surge sparked a rental building boom.

Housing economist Brad Hunter estimated almost 100,000 single-family rentals were under construction this year, adding it will eventually get to 180,000 to 200,000 units per year.

“Demand is far above that,” Hunter said in a Dec. 1 podcast over the RealWealth Network. “The communities are leasing up literally as fast as most of these builders and developers can produce homes and get them ready to move in.”

Builders won’t catch up with renter demand before 2025, Hunter said, with projects typically taking three or more years to build — and longer in California.

For dog owners, a single-family rental can mean you no longer need to worry about getting out the leash, heading down an elevator and walking your dog, he noted. Instead, you just “open the back door.”

“The yard is important, especially for young families that have children,” Hunter added. “They want to have a yard for the kids to play, and you can’t really have that in an apartment.”

$30 billion lined up

The 2007-12 housing crash created the opportunity for hedge funds to scoop up large portfolios of foreclosed homes and rent them out.

Technology made it possible for those funds to manage and maintain large numbers of houses scattered throughout cities. Securitization and the formation of real estate investment trusts followed, creating a new real estate asset class out of what was predominantly a mom-and-pop type venture beforehand.

The nation’s largest single-family landlord, Invitation Homes, has more than 80,000 rental houses scattered throughout 11 states, including at least 8,000-10,000 in Southern California. As of September, Calabasas-based American Homes 4 Rent owned 56,077 rental houses in 22 states. Of the 1,292 homes added to the company’s portfolio last summer, 368 are newly built houses.

But small investors still dominate.

RCLCO’s LaRue reported that 89% of single-family rentals are owned by landlords with five or fewer properties. Investors with 100 or more properties probably make up about 2% of the single-family landlords.

But that’s not stopping Wall Street and institutional investors from expanding.

Irvine-based John Burns Real Estate Consulting reported in October it had identified 43 deals totaling $30 billion since March 2020 for the purchase or construction of single-family rentals. And that’s just the amount that’s public.

“The real number is much higher,” senior research manager Danielle Nguyen wrote.

Mounting inflation, low bond yields and record-high rent growth are driving investor interest, Nguyen wrote.

The CoreLogic single-family rent index reported single-family rent growth hit its sixth consecutive record in October, with rent up 10.9% nationally. The John Burns Single-Family Rent Index showed rents up 6% this year, the highest in at least 35 years.

The Burns index showed single-family rents up 2% in L.A. County, 4% in Orange County and 8% in the Inland Empire.

Meanwhile, investors are competing with home shoppers for the limited number of houses on the market.

Investors bought about one out of every five U.S. houses sold in the first half of 2021, CoreLogic figures show. Southern California had even higher levels of investor sales, with investors buying at least one out of every four houses sold through September.

Ringing off the hook

Sancerra’s project in Wildomar is the first of five the Newport Beach developer is pursuing, with contracts on four other parcels in Murrieta, Tracy, Vallejo and Mammoth Lakes.

The company needs to raise $500 million to finance those developments, which will take about four years to build. But raising cash shouldn’t be a problem, said Cook, the managing partner.

“The phone is ringing off the hook for people looking to place both debt and equity capital in build for rent,” he said. “All of those groups are out hunting for deals like the ones that we’re putting together.”

Preliminary floor plans show two- and three-bedroom units ranging from 1,400 to 1,700 square feet.

The Sancerra townhomes meet the industry definition of single-family rentals because each unit has walls separating them from ground to roof without any units above or below them. But they also come with amenities common in apartment complexes: pools, cabanas, barbecues, fire pits and a clubhouse.

“This is single-family living,” Cook said.

John Burns, CEO of his eponymous real estate consulting firm, doubts build-for-rent single-family homes will catch on in California.

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Investment yields in Southern California are among the lowest in the nation, his data show. In addition, the state also is losing population, while other markets are growing. And investors fear the risk of rent control is higher in California than other parts of the country.

“For all of those reasons, Sancerra will have the benefit of very little competition,” Burns said in an email.

But Cook remains optimistic. For one thing, the occupancy rate in southwest Riverside County is at least 97%. For another, there’s an exodus from expensive, high-density areas like L.A. and Orange counties to the Inland Empire.

“It think it will (expand). I think it’s a product that serves an important customer segment,” he said. “ … We are super bullish that build for rent is an important tool for addressing the housing shortage in California. We think it aligns well with the demographics that we’ve been seeing and expect to continue to see.”