The landlord called Wall Street
Individual mom-and-pop landlords, who own only one or a few properties, make up the majority of rental housing — for now.
But what about those private equity firms and large institutional investors with billions of dollars at their disposal? Does their (fairly new) presence in the housing market change the direction of homeownership and renting?
Large-scale investors are buying up single family residences (SFRs) and renting them — removing those opportunities from potential owner-occupants. Critics argue this is creating a generation of renters, as reported by MarketWatch.
Nine of the biggest Wall Street investment firms own more than 200,000 SFRs in 13 states, according to an ACCE Institute report. While that’s a small proportion of the 16 million SFR rental properties nationwide, it does account for a large percentage of homes in the concentrated regions where these companies buy.
For instance, in Sacramento, the private equity firm The Blackstone Group’s single family rental arm, Invitation Homes is the largest private landlord in the county, and the second-largest property owner after the county of Sacramento itself.
After Invitation Homes merged with another large investment group, Starwood Waypoint Homes in November 2017, Invitation Homes became the largest landlord of SFRs in the U.S. and the second-largest real estate company in the world, owning 82,000 SFR rentals.
Here in California, Invitation Homes owns 15,600 homes, comprising 19% of their total portfolio, and growing, according to the ACCE Institute.
Invitation Homes chooses to invest in housing markets with strong demand and high barriers to entry (restricted supply) with high potential for rent growth, according to Invitation Homes’ Securities and Exchange Commission (SEC) report.
Much of California’s housing stock looks like the type Blackstone and other private equity firms love to snap up: in high demand and low supply.
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Institutional presence is difficult to track
How entrenched companies like Blackstone are in California remains a mystery since public data on institutional investor ownership doesn’t exist.
Complicating matters, corporate ownership includes but is not limited to institutional investors. Homeowners placing their homes in a revocable trust and small landlords incorporated for tax purposes as a limited liability company (LLC), for instance, are technically classified as corporate ownership properties, despite the massive difference in scale between these groups.
Thus, filtering out private equity assets from owner-occupant and mom-and-pop landlord assets is a challenge. But that hasn’t stopped researchers from piecing together an initial tally.
Los Angeles and Riverside have an estimated 8,000 SFR rentals owned by institutional investors, while Sacramento and San Francisco combined have an estimated 5,000 SFR rentals owned by institutional investors, as found in a study published by Emory University.
Looking at the population of renters compared to institutional investor-owned rental properties:
- Los Angeles and Riverside have 2.4 million renters; and
- Sacramento and San Francisco have 724,000 renters.
Thus, the institutional investor presence is:
- .03% in Los Angeles and Riverside; and
- .07% in Sacramento and San Francisco.
California is not as concentrated as other regions, particularly the Southeastern U.S., where 29,000 of Atlanta’s SFR rentals belong to institutional investors. Given that 235,000 renters live in Atlanta, about 12% of SFR rentals there are owned by institutional investors.
Since there is no publicly available data on rental property ownership, renter advocates are proposing a public rent registry which directly tracks rental ownership. Understanding who owns rental units is critical to ensuring quality rental stock and supporting landlords, according to the Urban Institute.
At the very least, the overall presence in California appears to be less than 1%.
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A permanent renter class or a path to ownership
Investors comprised 18% of purchases at the end of 2021. This was the highest level of investor presence since record-keeping on investor purchases began in 2000.
Homebuyers’ biggest enemy during 2021’s breakneck price gains was the institutional investor, flush with cash, snatching up SFRs from under their noses. With all-cash offers on the table, how could owner-occupants reliant on mortgage financing possibly compete?
For the same reason, real estate agents lose out when large investors move in. By cutting out individual buyers, institutional investors also cut out agent fees that come with each transaction. Meanwhile, these same buyers, cut out from ownership, lose out on wealth accumulation opportunities.
For these reasons, large institutional investors often fill real estate professionals and consumers with dread. Their rapidly growing footprint leaves one wondering if the goal for Blackstone and the like is to instill a permanent renter class. These institutional investors swooped in after the foreclosure crisis of 2008, thus transferring wealth from low-income groups and communities of color into the hands of a few large corporations.
Is there any way to shift power back to individuals from whom these large corporations benefited?
One solution is by the investor giving their tenants a right of first refusal. [See RPI Form 579]
Related Video: Word-of-the-Week: Right of First Refusal
Click here for more information on the right of first refusal.
The right of first refusal provides tenants with the ability to acquire the property when the owner decides to sell. It promotes a clear path to ownership, rather than perpetually indebting renters to their Wall Street private equity firm landlords.
In 2022, institutional forays into SFR ownership is turning a corner. Blackstone is halting its homebuying programs in half of its markets, as reported by Bloomberg.
These corporate giants experienced windfall profits since 2008’s housing crash, with mortgage interest rates low and prices consistently rising. They are recognizing a different housing market now.
With interest rates skyrocketing, consumer sentiment plummeting and home sales volume similarly falling through its market cycle peak, home prices are beginning to fall — eventually to meet the mean price trendline.
Thus, investors, buyers and real estate professionals are strapped in for a steep descent. Prices will decline by 40% from their peak in mid-2022, hitting the mean price trendline around 2025.
Real estate professionals can still cater to investors, who will continue to be some of the most active buyers during the recession — just as they were during the Great Recession. Real estate professionals can stay afloat by updating their knowledge on real estate syndicates and fulfilling the role of property manager for investment properties acquired by these syndicates. [See RPI e-book Forming Real Estate Syndicates]
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Whether they help individual buyers or large investors, real estate professionals will still be needed in the lean months ahead to facilitate transactions for both classes of buyers.
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