How private equity is changing the rental market
Landlords typically view their properties as long-term investments, with most deriving the bulk of their profits from renting from tenants. But new research has found that private equity-backed companies are increasingly failing. These companies are trying to profit in a much shorter time frame.
A new report from ProPublica looks at the role of private equity in the multifamily rental market. The report shows the growing proportion of residential properties owned by private equity and the impact of ownership changes on tenants. These companies don’t always act alone: Government-backed home financiers have committed billions of dollars to fund large purchases.
Marketplace Morning Report host Sabri Ben-Achour spoke to ProPublica’s Heather Vogell, the reporter behind the new investigation. Below is an edited transcript of their conversation.
Sabri Ben Achour: You wrote that there is this dramatic, mostly unnoticed, shift in control over a key part of this country’s housing stock. And you’re referring to private investment firms getting into the real estate business. Who are these companies exactly?
Heide Vogell: Yes, so these are companies that are backed by private equity. That means these are companies that are typically funded by some of the biggest pots of money on Wall Street, including pension funds, investment banks, college endowments – such huge amounts of money being invested in these funds. And these funds are created to buy big, expensive real estate. And in this case we are talking about large apartment buildings — millions of dollars, sometimes $1 billion or more. These companies will come and buy homes, sometimes by the thousands.
The cost of moving the apartment for tenants
Ben Achour: Landlords come in all shapes and sizes. What distinguishes these companies from the point of view of the people who live in these apartments?
Vogell: Well what I found out was that this type of landlord is really different from other types of landlords in that other types of landlords – mom and pop landlords or even other types of corporate landlords – typically want to do what they want to do, know They create a steady income through rent and hope that the property’s value will increase over time and they will end up with a piece of property that is more valuable than when they started. What’s different here is that you have a company that, in most cases, is going in without a long-term holding strategy. And what I mean by that is that this is a company that comes with plans to exit in a few years. Because at the end of the day, most private equity is about selling for a higher value, at a higher price, a few years after the purchase, reaping the big profits that they give back to their investors. For tenants, this means that a landlord comes in who wants to increase profits very quickly and then gets out again. You don’t have the same obligation or investment as a landlord who keeps the property for a long time over time. They don’t have the relationship that someone with a long-term retention strategy has, the tenants told me and what the advocates told me.
Ben Achour: When you say that these types of landlords behave in a way that is negative toward tenants, what do you think of?
Vogell: Well what we have seen has been very large rent increases and also a decrease in the services being provided to tenants. And that sounds kind of euphemistic. But what I am talking about is basic repairs, for example repairs to appliances and maintenance of common areas, security, things that are necessary for people to have a comfortable and quality life. That these are the kinds of things the tenants told us would end up on the chopping block.
Ben Achour: In your reporting you described a situation where this tenant was in a super nice modern glass building. He finds out it’s being bought by one of those private equity firms, and suddenly the garbage isn’t being collected and is piling up. The rent skyrockets. How typical is that?
Vogell: Well, I’ve heard from many other people who have had similar things happen in other cities with other companies. So you know, we have no way of documenting exactly how often it happens. But I hear it’s happening in cities across the country. And I’ve heard both from tenants who have been concerned about this and, frankly, from people who have done the financing and observed this – people in this industry. So, you know, it’s something that’s been a bit widespread, I think, especially in the last maybe five to seven years, and maybe it’s accelerated a little bit. But it’s hard to know exactly how many people we’re talking about.
Does this contribute to rental price inflation?
Ben Achour: Rent inflation is a serious problem right now. Do these companies contribute?
Vogell: I think that’s a really, really good question. And you know, they’re going to say no to providing the necessary capital to upgrade these buildings and in some cases build more homes. But what other people have said to me, other real estate experts have said that basically because we have more tenants in the market and we have a housing crisis that has really encouraged speculators – people who are looking for a quick profit – and stuff like that would describe this form of ownership. So the rental market is a huge market. There are many different causes of rent increases, but this could very well be one of them.
Freddie Mac and Fannie Mae play a role
Ben Achour: What’s behind it? They say it’s some kind of exploding phenomenon. What is behind this increase in private equity firms entering the real estate business, the landlord business?
Vogell: Well, what we found was that government-backed financiers like Freddie Mac and Fannie Mae really fueled this growth in private equity ownership of apartment buildings because they offered a type of financing that was very attractive to these companies. They had low interest rates and very few terms of financing. We got some data from Freddie that showed that of the 20 biggest deals Freddie has ever made in the multifamily business, 85% of them were with private equity firms. And all of those deals have been made since 2015, except for one. So it’s really quite a recent phenomenon that the deals have gotten so big and that private equity has been so dominant.
Ben Achour: What do you think is the most important takeaway for the American renter or homeowner’s experience?
Vogell: Well, I think what we’re seeing is that these companies are acting in ways that are problematic for renters to meet their investment goals. And while renters enjoy protections in some cities and in some states, it’s really a patchwork nationwide. And these are multi-state corporations. Sometimes they are even global. And they come into these areas, and in some places there’s nothing to protect the tenants. I mean, people keep asking me, “What can renters do to protect themselves from this?” And I’m not sure there’s anything a renter can do. There’s talk of trying to fit safeguards into Freddie and Fannie funding, but other than something that has a wider reach in states like this, I’m not sure what people can do.