Will Corporate Landlords Gobble Up Homes During Downturn? California Politicians Are Concerned

The following article was originally published May 28, 2020, and republished through a collaboration with KPCC and LAist.

Story by Aaron Mendelson

As the economy has cratered, California politicians are increasingly concerned that corporate landlords could swoop in and buy up single-family housing — in a repeat of the aftermath of the 2008 financial crisis.

The alarm has been raised by Governor Gavin Newsom, whose budget includes pledges about "guarding against private sector actors buying up distressed assets," and L.A. County Supervisor Hilda Solis, who told LAist "many communities were ravaged by what happened back in 2008."

They're raising the issue as the CEO of a Starwood, a large real estate investor, told shareholders, "when it's really ugly, it's a good time to invest."

So why are politicians concerned, and what do they want to do? And who, exactly, are "corporate landlords"?

THE RISE OF CORPORATE LANDLORDS

The emergence of corporate landlords is a modern phenomenon. The term generally refers to Wall Street and private equity-backed investors that snapped up single-family housing in the years after the Great Recession.

They're not your traditional "mom and pop" owners — instead these entities own and operate rental housing on a massive scale. Companies like Invitation Homes and American Homes 4 Rent have amassed tens of thousands of homes across the country, including portfolios in Southern California.

The companies bought homes at fire-sale prices after 2008, including many that had recently been foreclosed on. The federal government sold thousands of homes to large investors, and in local markets well-financed corporations could outmuscle aspiring homebuyers by paying cash.

At the same time, advances in technology made managing these growing, scattered portfolios simpler and more efficient.

But being a tenant in one of these homes can be challenging. Recent reporting has documented how large landlords juice profits by pushing costs onto renters: retaining security deposits, deferring repairs, assessing fees and hiking rents.

"These firms are fairly aggressive and finding different ways to increase revenue," said Elora Raymond, assistant professor of city and regional planning at Georgia Tech, who has studied the rise of corporate landlords. Her research shows how Atlanta-area landlords backed by "institutional investors" filed for eviction at much higher rates on tenants.

Corporate ownership hasn't been evenly spread out — investors have targeted areas with housing shortages, and in L.A. County "most impacted neighborhoods are middle-income communities of color," according to research by Maya Abood at MIT.

Her analysis showed corporate ownership was "dramatically higher" in areas of L.A. County with more black residents, and that corporate landlords were active in areas with punishing commutes.

"When houses are sold to cash-carrying investors for conversion into rentals, prospective homeowners and 'mom and pop' landlords are crowded out of the market, and communities suffer — particularly communities of color," Abood wrote in a 2018 report.

For their part, the single-family rental industry says the criticisms are off base. David Howard is director of the National Rental Housing Council, a D.C.-based trade group representing the industry. The tenant complaints about fees? "There's nothing egregious about the fees that our members charge. All the fees that are charged are spelled out in the lease agreements," he said.

As for the idea that corporate ownership has harmed neighborhoods, Howard said, "you saw a lot of neighborhoods and communities suffering because there were vacant homes," adding that landlords invested tens of thousands of dollars into homes to fix them up.

He took particular umbrage to comments made by L.A. County Supervisor Hilda Solis at a recent meeting that "speculators ... will worsen and create a market that will be unbearable for many of our residents."

"The implication that institutional investors are somehow buying up homes en masse and making conditions unbearable is so far from the reality of this industry," Howard said.

CALIFORNIA POLITICIANS WANT TO ACT. BUT HOW?

Solis' comments came as she was introducing a measure that would create a "right to purchase program" allowing property owners, before defaulting, to sell to existing renters, non-profits, community land trusts or other mission-driven groups.

The goal is to serve "as a tool to stabilize existing communities and counter speculative or large-scale corporate purchase of residential properties," the motion says. It passed 4-1 earlier this month; County staff will report back on specifics to board in June.

In an interview with LAist, Solis called the effort "a backup so that those homes aren't sold to Wall Street investors, but stay in the hands of local communities."

It attracted fire from local landlords almost immediately. "The County is now seeking to compel the sale of these private properties to renters or other entities chosen by the County as property owners go broke," Apartment Association of Greater Los Angeles director Daniel Yukelson wrote in an email. He equated the measure to the theft of private property.

Increasing consolidation in single-family rentals isn't a foregone conclusion. David Howard said some National Rental Housing Council members had put acquisitions on hold.

But a recession of any length could favor it. Broker David Schechtman, recently told the Wall Street Journal that "real-estate investors — when you take the emotion out of it — many of them have been waiting for this for a decade."

That was the concern expressed in Gov. Gavin Newsom's recent budget. State and local efforts to preserve affordable units will be critical, said Russ Heimerich of the state's Business, Consumer Services and Housing Agency. "What we don't want to have happen is what happened during the Great Recession, namely, that affordable housing that is financially distressed gets bought up by investors who view units only as commodities," he said.

Congressman Mark Takano has also raised alarms about corporate landlords in recent years. Takano's district includes Riverside, which was devastated by the housing crash.

"I fear that structurally, it will get even more onerous for ordinary people to ever think about homeownership," Rep. Takano said in an interview.

He said he was considering a bill to cap the size of real estate investment trusts, or REITs, a common vehicle for large landlords. "At what point is a REIT that's made up of single family homes too big?" he asked.

His answer: maybe 200 homes.

A bill keeping REITs small would face an uphill battle in D.C. Key players in the rise of corporate landlords, including Colony Capital's Tom Barrack and Blackstone's Steve Schwarzman, are close allies of President Donald Trump.

And in spite of the fears expressed by California politicians, there's no clear-cut path to bolstering homeownership. "We're groping for a solution," Takano said.

The factors that have fueled the growth of corporate landlords are unlikely to disappear, according to Raymond, at Georgia Tech. "Who's going to become the new landlord, you know? It's going to be someone with money," she said. "And I think we know who that is."