For many, searching for a new home isn’t what it used to be. There are many internal and external factors that impact future homeowners’ decision to find a place to settle down or stay for just a few years. Rising mortgage rates, nonreciprocal growth in housing prices and wages, and decreasing housing supply are all contributing factors to this problem.
However, there’s another aspect of the ongoing issue, the increase in corporate investment in residential real estate.
If there is a persisting cost of living crisis in the foreseeable future, investment into residential real estate could be a bigger part of the problem. Regarding the housing markets, are the strategies of firms like Blackstone or Brookfield just a minor contribution to the problem? They are playing a larger role than we may think.
As investment strategies have evolved over time, large asset managers have seen the value of investing in real estate. According to consulting firm McKinsey & Company, global deal volume in the sector was the second highest on record at $1.135 trillion in 2022, despite the significant decrease from the previous year before. Firms are able to raise money from a variety of high net-worth or institutional investors that make commitments to these funds that buy up real estate properties.
The categories within the sector can be broken down into five areas. Multifamily, which has multiple separate housing units in one building, hotels, offices, retail, which includes shops, stores and pharmacies, and industrial, which includes facilities related to production, manufacturing, and warehousing.
In the past two record-high-performing years the Multifamily sector has led the pack making up 34.04 percent and 30.4 percent of the total deal volume in 2021 and 2022, respectively.
What we can interpret by these numbers is that investors are cashing in on a fast-growing opportunity that is linked to a major part of our economy, the housing markets. But a positive opportunity for one party doesn’t necessarily benefit the rest.
Institutional investors buying up properties have contributed to the housing market’s supply shortages. With flush amounts of capital, major asset managers such as Carlyle, Apollo and KKR, can take advantage of areas with inexpensive aggregate property values and buy these properties in bulk, thus expanding their portfolio.
Renovating and converting these properties into apartments or housing complexes and renting them out, can price out many of the buyers in the surrounding areas and limit overall residential ownership.
While there are negative perceptions of these investment concepts, there can be positive outcomes as well.
Dr. Lynne Kelly, associate professor in the Department of Finance and International Business at Howard, understands that asset managers investing in residential real estate can favor consumers and the economy when it is needed.
Although corporate investment in residential properties can reduce the supply of homes available and increase the prices, which can be viewed as harmful to homebuyers, these investments proved helpful during the housing crisis in the mid to late 2000s.
“This provided price stability and homeowners did not experience house price depreciation,” Kelly said. This is important because owning a home that appreciates in value is a primary contributor to overall wealth.
Kelly continued to say that “it was helpful to municipalities because strong housing markets provide strong tax bases which means municipalities have the funding necessary to build parks, schools, etc.”
However, there were still victims of institutional residential real estate investing as many people who lost their homes after the crisis had to rent from private investors. “This is a harsh reality. There was an unprecedented wealth transfer from individual families to investors,” Kelly said. “Unfortunately, all economic shocks hit minority households the hardest.”
We now see a repeat of this coming out of the pandemic. Private equity and corporate investors continued to target underrepresented communities, making it harder for first-generation homebuyers within those areas to purchase homes.
Out of the number of homes going for sale in Memphis and Atlanta, for example, investors bought more than 30 percent of the single-family homes in the second quarter of 2021, according to Americans for Financial Freedom.
The creation of affordability issues can also persist through partnerships with investors such as our nation’s higher education institutions.
According to the LA Times, the University of California system struck a $4 billion deal to invest in Blackstone’s Real Estate Income Trust. UC employees and housing advocates have said that the capital has been used to buy up homes and apartments in California and other states which have made the cost of living more unaffordable.
Tenants in San Diego apartments have said that they have received annual rent increases of 8 to 9 percent, which was higher than what the previous landlord had set. Poor maintenance and repairs were also reported by families that were living in the newly acquired rentals.
Private equity landlords have been imposing new fees and charges, that apply financial pressure on tenants that may already have trouble maintaining rent and other costs in this dynamic macroeconomic environment. These can include fees to use mandatory digital repayment platforms or processing and administration fees that can add up over time and push a tenant to eviction.
Americans for Financial Reform estimated that as of June 2022, private equity firms at a minimum owned 1.07 million apartment units in the country – that’s out of approximately 22 million units, according to the National Multifamily Housing Council. With this number more than likely growing, the sting will be felt nationwide and could be hitting our upcoming college graduates particularly hard.
Like many students, Quincy Baker, a junior political science major minoring in TV & film from Staten Island, New York, will have to navigate the soaring cost of living prices on top of his other passions. As a native of New York, he has been exposed to the spike in inflation in the cost of living and understands that he’ll have to find that balance between working and pursuing his law degree simultaneously to be able to make rent.
“I’m going to have to do it at the end of the day but I’m certainly going to be apprehensive about rent,” Baker said.
Kedues Samuel, a sophomore computer science major from St. Paul, Minnesota, understands how fast increasing rent increases could pressure students who borrow to fund their education.
“Especially if you have student loan debt coming out of college, it’ll be even harder to get started on looking where to live with prices maintaining these highs,” Samuel said.
Through the “build-to-rent” strategy, single-family homes are being constructed with the specific intention of renting them, according to real estate education company Fortune Builders. They often are built as complexes and can at times come with a variety of amenities, to give it a gated community feel.
Private equity firms have partnered with players within the homebuilding industry to shift from traditional home buying to individuals or families having to rent from a corporation. As an example, Allianz Real Estate and Centerbridge teamed up with homebuilder Lennar to buy $4 billion in newly constructed single-family homes for rental properties.
Copy edited by Alana Matthew