Wall Street is now America’s biggest landlord. What does that mean for the American Dream?

The Wall Street bull. Image: Getty.

Owning a family home in the suburbs has been a cornerstone of the American dream for many generations. But in 2008, when the United States’ housing bubble burst and a spate of mortgage foreclosures triggered the global financial crisis, that dream was vanquished, and such houses would instead become the sites of shattered lives.

In the aftermath of the crisis, hundreds of thousands of suburban homes were repossessed and sold at auction. With the market in shambles, prices were low. Tightened credit made it hard for individuals to buy – even for those whose credit was not destroyed by the crisis. Investors saw an opportunity, and began buying up houses.

Though house prices have recovered in many regions of the US, many of the people living in these homes are now renting – and their landlords are some of the biggest investment firms on Wall Street. Of course, small scale, mostly local investors have long owned and rented out individual houses. But it simply wasn’t feasible to manage large numbers of individual homes at a distance. As technology changed, it became much more practical for large corporations to manage individual homes spread across different regions.

With access to credit and funds unavailable to the average home buyer, large investors have been able to enter the landlord market in ways that have never been seen before. Blackstone – the world’s largest alternative investment firm – pioneered new rent-backed financial instruments in 2013, whereby rent checks are bundled up and sold as securities, similar to the way that mortgage payments are turned into financial products bought by investors.

Now, Blackstone’s rental company Invitation Homes looks set to merge with Starwood Waypoint Homes; a move that would create the nation’s largest landlord, with roughly 82,000 homes across the country. Another Wall Street backed firm, American Homes 4 Rent, owns a further 49,000 homes across 22 states.

Renting the American dream

Since 2010, the United States has seen a massive rise in the number of families renting the kind of single-family houses that have long been the desire of would-be homeowners chasing the American dream. While estimates vary, the inventory of single family homes being rented has grown by anywhere from three to seven million (35 per cent to 67 per cent) compared with pre-crisis levels. Single-family houses are now the most common form of rental property in the United States.

Overwhelmingly, the people living in these houses are families. Our ongoing research with Jake Wegmann of the University of Texas and Deirdre Pfeiffer of Arizona State University shows that almost half of Single Family Rented (SFR) households (49 per cent) have at least one child under 18; a far greater percentage than rental properties with multiple units (roughly 25 per cent) and owner-occupied homes (31 per cent).

According to our own analysis of the American Community Survey, in 2015 an estimated 14.5m children in the United States lived in a rented single-family home. Demographically, single-family renters are more likely than owners to be people of colour, and to face moderate or severe housing cost burdens. The upshot of all this is that the 40m or so people living in SFR homes now form the basis of a new asset class of rental-backed securities.


Destination unknown

Scaling up portfolios consisting of thousands or tens of thousands of rental homes has made it possible for Wall Street firms to roll out financial instruments suited to “a rentership society”. Securitisation allows big investors to borrow against the value of the properties, to buy more properties and pay off old debt, and acts as a loan that tenants pay back with their rent checks.

Wall Street is no stranger to the housing business in America. But their involvement as landlords of single-family homes is new, and so are the financial instruments they have developed. The impact of Wall Street’s new role is unclear. While rehabilitating houses and helping to stabilise home values in the hardest-hit markets, they may also be crowding out first-time buyers, creating a lopsided market that shuts out would-be owner-occupiers.

Some Wall Street landlords have been singled out for poor repairs, problems with billing and collections and lacklustre customer service. There is also growing concern about the fact that renters of single-family homes have little protection, even in cities with some form of rent control. A report from the Federal Reserve Bank of Atlanta found that large corporate owners of houses are more likely than smaller landlords to evict tenants; some filed eviction notices on up to a third of their renters in just one year.

Here to stay

Wall Street landlords are also making new political allies, hinting they intend to stick around. The largest single-family rental companies have banded together to form a trade group, the National Rental Home Council, which promotes large-scale, single-family rental housing and advocates for public policies friendly to their interests. And it seems to be working.

In an unprecedented move, just after President Trump’s inauguration, the government-backed mortgage agency, Fannie Mae, agreed to underwrite Blackstone’s initial public offering of Invitation Homes stock, to the tune of a billion dollars. Blackstone’s CEO is Steve Schwarzman, one of the president’s most loyal backers. And Thomas Barrack – the recently departed leader of Colony Starwood Homes, which is preparing to merge with Invitation Homes – is a longtime friend of the mogul-turned-president.

Meanwhile, another government-backed agency, Freddie Mac, has announced that it too was supporting investment in single-family rentals, but with a focus on financing for mid-size investors and with an explicit goal of maintaining rental affordability. Non-partisan organisations like the Urban Institute have also suggested that government-backed financing opportunities could help single-family rental serve as a new affordable housing strategy.

The ConversationAll of these developments suggest that the downward trend in home ownership after the financial crisis could be here to stay. And while there is nothing wrong with renting – just as there is nothing inherently good about owning – the changes we are seeing in the single-family rental market bear ongoing scrutiny, to ensure that Wall Street’s demand for profit does not once again wreak havoc on Main Street.

Desiree Fields is a lecturer in urban geography at the University of SheffieldAlex Schafran is a lecturer in urban geography, and Zac Taylor a PhD candidate in geography, at the University of Leeds.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

A new wave of remote workers could bring lasting change to pricey rental markets

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus. (Valery Hache/AFP via Getty Images)

When the coronavirus spread around the world this spring, government-issued stay-at-home orders essentially forced a global social experiment on remote work.

Perhaps not surprisingly, people who are able to work from home generally like doing so. A recent survey from iOmetrics and Global Workplace Analytics on the work-from-home experience found that 68% of the 2,865 responses said they were “very successful working from home”, 76% want to continue working from home at least one day a week, and 16% don’t want to return to the office at all.

It’s not just employees who’ve gained this appreciation for remote work – several companies are acknowledging benefits from it as well. On 11 June, the workplace chat company Slack joined the growing number of companies that will allow employees to work from home even after the pandemic. “Most employees will have the option to work remotely on a permanent basis if they choose,” Slack said in a public statement, “and we will begin to increasingly hire employees who are permanently remote.”

This type of declaration has been echoing through workspaces since Twitter made its announcement on 12 May, particularly in the tech sector. Since then, companies including Coinbase, Square, Shopify, and Upwork have taken the same steps.


Remote work is much more accessible to white and higher-wage workers in tech, finance, and business services sectors, according to the Economic Policy Institute, and the concentration of these jobs in some major cities has contributed to ballooning housing costs in those markets. Much of the workforce that can work remotely is also more able to afford moving than those on lower incomes working in the hospitality or retail sectors. If they choose not to report back to HQ in San Francisco or New York City, for example, that could potentially have an effect on the white-hot rental and real estate markets in those and other cities.

Data from Zumper, an online apartment rental platform, suggests that some of the priciest rental markets in the US have already started to soften. In June, rent prices for San Francisco’s one- and two-bedroom apartments dropped more than 9% compared to one year before, according to the company’s monthly rent report. The figures were similar in nearby Silicon Valley hotspots of San Jose, Mountain View, Palo Alto.

Six of the 10 highest-rent cities in the US posted year-over-year declines, including New York City, Los Angeles, and Seattle. At the same time, rents increased in some cheaper cities that aren’t far from expensive ones: “In our top markets, while Boston and San Francisco rents were on the decline, Providence and Sacramento prices were both up around 5% last month,” Zumper reports.

In San Francisco, some property owners have begun offering a month or more of free rent to attract new tenants, KQED reports, and an April survey from the San Francisco Apartment Association showed 16% of rental housing providers had residents break a lease or unexpectedly give a 30-day notice to vacate.

It’s still too early to say how much of this movement can be attributed to remote work, layoffs or pay cuts, but some who see this time as an opportunity to move are taking it.

Jay Streets, who owns a two-unit house in San Francisco, says he recently had tenants give notice and move to Kentucky this spring.

“He worked for Google, she worked for another tech company,” Streets says. “When Covid happened, they were on vacation in Palm Springs and they didn’t come back.”

The couple kept the lease on their $4,500 two-bedroom apartment until Google announced its employees would be working from home for the rest of the year, at which point they officially moved out. “They couldn’t justify paying rent on an apartment they didn’t need,” Streets says.

When he re-listed the apartment in May for the same price, the requests poured in. “Overwhelmingly, everyone that came to look at it were all in the situation where they were now working from home,” he says. “They were all in one-bedrooms and they all wanted an extra bedroom because they were all working from home.”

In early June, Yessika Patapoff and her husband moved from San Francisco’s Lower Haight neighbourhood to Tiburon, a charming town north of the city. Patapoff is an attorney who’s been unemployed since before Covid-19 hit, and her husband is working from home. She says her husband’s employer has been flexible about working from home, but it is not currently a permanent situation. While they’re paying a similar price for housing, they now have more space, and no plans to move back.

“My husband and I were already growing tired of the city before Covid,” Patapoff says.

Similar stories emerged in the UK, where real estate markets almost completely stopped for 50 days during lockdown, causing a rush of demand when it reopened. “Enquiry activity has been extraordinary,” Damian Gray, head of Knight Frank’s Oxford office told World Property Journal. “I've never been contacted by so many people that want to live outside London."

Several estate agencies in London have reported a rush for properties since the market opened back up, particularly for more spacious properties with outdoor space. However, Mansion Global noted this is likely due to pent up demand from 50 days of almost complete real estate shutdown, so it’s hard to tell whether that trend will continue.

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus, but many industry experts say there will indeed be change.

In May, The New York Times reported that three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — have hinted that many of their employees likely won’t be returning to the office at the level they were pre-Covid.

Until workers are able to safely return to offices, it’s impossible to tell exactly how much office space will stay vacant post-pandemic. On one hand, businesses could require more space to account for physical distancing; on the other hand, they could embrace remote working permanently, or find some middle ground that brings fewer people into the office on a daily basis.

“It’s tough to say anything to the office market because most people are not back working in their office yet,” says Robert Knakal, chairman of JLL Capital Markets. “There will be changes in the office market and there will likely be changes in the residential market as well in terms of how buildings are maintained, constructed, [and] designed.”

Those who do return to the office may find a reversal of recent design trends that favoured open, airy layouts with desks clustered tightly together. “The space per employee likely to go up would counterbalance the folks who are no longer coming into the office,” Knakal says.

There has been some discussion of using newly vacant office space for residential needs, and while that’s appealing to housing advocates in cities that sorely need more housing, Bill Rudin, CEO of Rudin Management Company, recently told Spectrum News that the conversion process may be too difficult to be practical.

"I don’t know the amount of buildings out there that could be adapted," he said. "It’s very complicated and expensive.

While there’s been tumult in San Francisco’s rental scene, housing developers appear to still be moving forward with their plans, says Dan Sider, director of executive programs at the SF Planning Department.

“Despite the doom and gloom that we all read about daily, our office continues to see interest from the development community – particularly larger, more established developers – in both moving ahead with existing applications and in submitting new applications for large projects,” he says.

How demand for those projects might change and what it might do to improve affordable housing is still unknown, though “demand will recover,” Sider predicts.

Johanna Flashman is a freelance writer based in Oakland, California.