From American Affairs Journal, Spring 2021:
The Covid-19 pandemic set off a frenzy for suburban houses. But it’s not just millennials looking for patios and home offices; Wall Street is house hunting as well. Private equity firms, insurance companies, and pensions are betting that many Americans will have to rent the suburban lifestyle to which they have now become accustomed and are racing to accumulate houses to lease to them.
Wall Street’s rental gambit began a decade ago at the depths of the housing crisis, when financiers sent buyers to foreclosure auctions with duffel bags full of cash. By the time the economy was shut down in March 2020 to slow the spread of coronavirus, public companies and institutional investors owned more than 350,000 single-family rental homes clustered in good school districts around growing cities.
The sudden unemployment of millions seemed to present a grave threat to this business model, however. How many of these investors’ tenants would keep paying rent? As it happened, pretty much of all of them.
Mega landlords such as Invitation Homes, American Homes 4 Rent, and Tricon Residential—with more than 150,000 houses between them—have reported record occupancy and timely rent payment on par with pre-pandemic rates. Cooped-up members of the work-from-home class are streaming their way and quickly snapping up vacancies, despite asking rents being pushed up by more than 10 percent year over year in some places. That’s remarkable in good times. It’s eye-popping amid recession.
The pandemic has thus allayed any lingering doubts that pools of suburban rental houses can be managed profitably. Plus, there’s not a lot of other appealing places to invest the $150 billion or so amassed in private equity funds dedicated to property deals. The outlook is cloudy for office towers, hotels, and shopping malls. Apartment complexes catering to service workers have been walloped.
Bold-faced names of finance have piled into landlording since the pandemic began. J.P. Morgan Asset Management is building $625 million of houses expressly to lease with American Homes 4 Rent. Rockpoint Group, a private equity firm that historically invested in apartments and developed subdivisions, teamed with Invitation Homes to buy $1 billion worth of high-end rentals for six-figure earners and then struck a $250 million deal with another landlord to buy cheaper houses for working-class tenants.
Blackstone Group, which built Invitation into the country’s largest landlord and cashed out in November 2019 with billions in profit, didn’t stay on the sidelines long. In August, Blackstone invested $240 million in Tricon.
Koch Industries, Brookfield Asset Management, and Nuveen have each made their own nine-figure investments in expanding rental operations. Last year, a multibillion-dollar bidding war broke out for a fourteen-thousand-house landlord called Front Yard Residential.
The pandemic has emboldened Wall Street, offering proof that the mega-landlord business model can withstand economic shock. But investors are counting on their bets to keep paying off well after Covid-19 is tamed.
Housing 2.0
Most Americans associate the housing crash with 2008, but three years later, in 2011, home prices were still in free fall. Double-digit foreclosure rates plagued cities like Miami and Las Vegas. Home values plunged by more than half around Phoenix.
That summer, a team of housing analysts at Morgan Stanley sent the investment bank’s clients a report that would become wildly influential. It was titled “A Rentership Society.” In it, as well as in subsequent papers, the analysts forecast a surge in the number of renters and a potentially massive opportunity for investors to convert the glut of repossessed homes into rental properties.
There were more than 1.6 million foreclosed homes on the market around the country, and judging by the hundreds of billions of dollars in delinquent mortgages out there, more were on the way. In each foreclosed home, the analysts saw both a potential rental property and a new renter hitting the street whose needs—room for children, access to good schools—were unlikely to be met by an apartment.
The analysts noted the bursts of household formation that usually follow recessions, during which people tend to delay things like marriage, having children, moving out of their parents’ homes, and even divorce. Banks were stunned by losses and facing the wrath of lawmakers. They were being as tightfisted with home loans as they had been lavish with them before the crash. Billowing student debt was making it as difficult as ever to save for down payments, which were back in style among lenders.
Attitudes toward renting were changing, too. Homeownership had resulted in financial pain and sacrifice for millions of Americans. The argument that paying rent was wasteful had lost resonance. The economy’s shift from manufacturing to service and information jobs meant fewer workers tethered to particular towns for their entire careers. That had boosted the option value of renting, the analysts said. Being able to move for employment without worrying about selling a house and paying sales commissions and other fees was more important than ever. A big rental investor who was an early acolyte of the rentership society once asked me, when I interviewed him for the Wall Street Journal (where I’m a reporter), “Is renting a home really that much different from renting the money to buy one?”....
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