Two local real estate companies have combined to better tackle the build-to-rent housing market, which has garnered increasing interest from young Americans priced out of buying a home due to factors like high housing costs and rising interest rates.
Westlake Village-based Sunstone Properties Trust and Two Tree Capital announced early this month that they combined under the banner of Sunstone Two Tree following restructures to their respective companies.
The two companies offered similar services in different real estate sectors prior to the combination.
Sunstone Properties Trust was an owner, operator, developer and fund manager focused on multifamily assets, while Two Tree Capital was a developer and operator of single-family rental home communities.
“At the most basic level, both companies are trying to address a similar issue, which is trying to provide attainable, quality rental housing,” Sunstone Two Tree President Scott Maddux said. “And as a country, we are underserving that population. No matter what type of renter you are, we have not built enough homes since the global financial crisis.”
Maddux previously served as the chief executive of Two Tree Capital alongside his brother, Tanner Maddux, who was the president of Two Tree Capital and is now the chief investment officer at Sunstone Two Tree.
The brothers’ father, John Maddux, headed Sunstone Properties Trust as chief executive and retains the same position at the combined company. Most of Sunstone Two Tree’s 35 employees are based in Westlake Village and will operate under one roof following the combination.
Now, the combined company is turning its attention toward acquiring, renovating and developing workforce housing through the multifamily and build-to-rent single family markets.
The build-to-rent market, which consists of single-family homes intended to be rented, is an opportunity in the eyes of Scott Maddux, who pointed to rising interest rates and lifestyle preferences among millennials and other generations.
“You think about this millennial generation and all the demand that is being generated by folks who are finally getting married and having kids, while at the same time not having a lot of money to make a down payment on a home because of student debt and other things that are constricting their savings,” Scott Maddux said. “(This is) overlaid with the interest rate environment that we’re in today, which is causing monthly mortgage payments to be elevated relative to the last few years.”
According to online real estate platform Zillow, the average U.S. home value is more than $300,000 as of late February, up 6.8% over the past year and 55% over the past five years.
Scott Maddux said that millennial preferences such as spending money on experiences as opposed to things such as housing is creating significant demand for homes that have more square footage for children, pets and storage space. He noted that mom and pop landlords have played a large role in managing such properties.
“What we’re doing is providing that space and amenities. So, the larger home, the backyard, the garage, plus your typical pool, clubhouse, fitness center and barbecue package,” Scott said. “We’re coupling that with a professional management company that will come and respond to a leaky sink or a broken window much faster than mom-and-pop landlords would.”
An important facet of Sunstone’s plan for developing and operating houses is the prioritization of workforce housing following the last few years in which luxury housing increased in popularity.
“When you look around Southern California, most of what you see being built is class-A luxury housing, upper-end, high rents and highly amenitized locations, many of them in transit corridors,” John Maddux said. “What we do is buy and renovate what we call workforce housing, or B class housing. We like to say we create Camrys and Honda Accords for the masses.” Scott Maddux added that a large reason for operating within the multifamily market is that such real estate acts as a solid hedge against inflation.
Growth in rents
“On average, our rents have grown about a percentage point higher per year over the last 10 years,” Scott Maddux said. “So we’ve experienced really strong rent growth and a big part of that is that people aren’t building entry-level workforce housing, they’re trying to build the biggest, nicest luxury apartment community that they can. So, we don’t have a lot of new supply that we’re competing with, which allows us to increase our rents.”
As Sunstone Two Tree looks to grow, Scott Maddux said the company has its eye on one challenging economic factor that could impact business: real estate liquidity.
The matter is a top concern for Sunstone, as the banking sector’s recent turmoil could spell danger for real estate.
“As liquidity comes out of the market, that will slow transaction activity in real estate, and it will slow overall economic activity,” Scott Maddux said. “I think that will continue to put pressure on real estate values. That’s something that we’re watching very, very closely.”