Image commercially licensed from Unsplash
While the U.S. multifamily housing market still jostles with inflation and interest rates, some investors continue to sideline capital and wait for conditions to ease. Meanwhile, MZ Capital Partners has turned toward two growing markets — single-family housing rentals and Knoxville, Tennessee — to find a confluence of opportunity.
MZ Capital Partners in April announced the purchase of the Residences at Devanshire, a community of 87 single-family rental homes in West Knoxville. The community features ranch houses with three bedrooms, two full bathrooms, and two-car garages. The Residences at Devanshire are in a desirable suburb 20 minutes from downtown Knoxville with the Great Smoky Mountains in view.
The purchase extends MZ Capital Partners’ footprint in the Knoxville region, where the firm has owned and operated multifamily rental properties for 20 years. Since announcing the acquisition, MZ Capital Partners has reported significant interest from potential renters in a market whose occupancy rate reached a near-record 98 percent last year.
“The number of inquiries we’ve received from prospective renters is extremely high, far higher than we’ve anticipated,” said Michael H. Zaransky, founder and managing principal of MZ Capital Partners. “There’s a robust demand for this product and extremely high demand in this market for rentals.”
Single-family rentals (or SFR) have become increasingly popular in the housing market, giving families access to homes they can’t yet, or choose not to, buy. According to the Urban Land Institute, SFR demand grew during the financial crisis of the late 2000s and accelerated further during the pandemic. People looked to smaller cities and suburbs for places to live, found for-sale listings thin or too pricey — or sought the carefree lifestyle of not owning — and turned toward rentals.
Zaransky, whose Northbrook, Illinois, firm specializes in multifamily housing, saw the investment potential for single-family rentals. The multifamily housing market has been volatile: It demonstrated exceptional demand in early 2022, fell in the fourth quarter, and re-accelerated in the first quarter of 2023.
But within that market, Zaransky said single-family housing rentals have shown significant promise, and other real estate experts agree. Brad Hunter, president of Hunter Housing Economics, told the Urban Land Institute that developers could build 132,000 homes specifically for rent this year alone. Build-to-rent construction could reach 167,000 homes by 2025, Hunter told ULI.
There are several reasons, Zaransky said. Young families want to live in single-family homes with access to highly rated schools, recreation, and lifestyle amenities. Empty-nesters, meanwhile, seek more freedom from the requirements of ownership. Those working to become homeowners, and those seeking the freedom of a professionally managed and maintained lifestyle, bridge the gap by renting.
“In general, single-family rentals and the build-to-rent market are very appealing because of the demographics and the demand,” Zaransky said. “People like the idea of living in a single-family home but, for whatever reason, aren’t ready, or choose not, to buy one and would rather rent. That caused us to take a deeper dive and explore where we would like to allocate investment dollars into this sector.”
MZ Capital Partners’ deep dive led it to Knoxville, where the firm’s existing and long-term investments provided on-the-ground insight. Knoxville is a highly desirable place to live based on its job market, cost of living, and quality of life. The region’s unemployment rate in March 2023 was 2.8 percent, according to the U.S. Bureau of Labor Statistics, and its cost of living index is 15 percent lower than the national average, according to Payscale.
Knoxville boasts a timeless Southern downtown, an energetic and diverse community that includes the University of Tennessee, and the breathtaking sights of Great Smoky Mountains National Park. And it’s an eclectic place. In 2023, Knoxville hosted more than 160,000 people for the most-attended edition of the Bassmaster Classic, known as the Super Bowl of bass fishing. The city also is considered among the best to live and work for people who make movies.
West Knoxville, where the Residences at Devanshire is located, is an upscale yet affordable community that also trades on the natural beauty of its surroundings, Zaransky said. It features top-rated schools and access to the nation’s leading shopping and dining brands.
“And when you sit on your back deck or walk out the front door, you have a wonderful view of the Smoky Mountains,” Zaransky said.
Following the Knoxville acquisition, Zaransky said MZ Capital Partners wants to extend its momentum in the single-family rental market through both acquisitions and ground-up development. The firm is assessing other single-family rental properties for purchase and could acquire land to develop build-to-rent communities in other U.S. locations.
“We think this has pretty substantial legs for us,” Zaransky said. “It’s an entry into the sector that we’ve been studying for a long time and the foundation of a platform that we wish to expand into a national portfolio.”