Amid a national housing crisis, giant private
equity firms have been buying up apartment buildings en masse to squeeze
them for profit, with the help of government-backed Freddie Mac.
Meanwhile, tenants say they’re the ones paying the price.
Daniel Cooper could barely
afford a tiny apartment at the 13-story Olume building in downtown San
Francisco. But the expansive view from the roof deck captivated him.
Raised in a small city in
Kentucky, Cooper was struck by the grandeur of the skyline before him,
from the soaring heights of Salesforce tower, San Francisco’s largest
skyscraper, to the gleaming gold cupolas atop St. Joseph’s Church, one
of the city’s historic landmarks.
The sense of opportunity he
felt when looking out on his new hometown helped convince the software
engineer to become one of the glassy new building’s first tenants in
2016. He joined Mévis Mousbé, a driver for a ride-sharing service who
had been the first to move in. She admired the high ceilings in her new
junior studio on the sixth floor, which she shared with her Shih Tzu,
Roxie-Jolie. A few months later, “Specs” Titus, an entrepreneur whose
eyeglasses inspired her nickname, settled happily into a corner unit on
the eighth floor with her daughter. She’d won it in a lottery for
apartments with below-market rents.
But prospective tenants weren’t the only ones eyeing the new apartment building, with its 121 units, gym and rooftop fire pits.
In July 2017, Cooper
received an email announcing that Greystar, the property management and
real estate investment behemoth, was taking over the building. The
private equity-backed firm was buying the Olume’s owner, Monogram
Residential Trust, and its investments in four dozen properties scattered across 10 states. Cooper worried his new community was about to change.
As Greystar took charge,
his alarm grew. Rents soared. Trash collected in the hallways and on the
rooftop deck, Cooper said. The security guard showed up less often. One
tenant said she was frightened when she encountered a large, seemingly
drunk man she didn’t know dancing in a leotard and tutu in the parking
garage. Another renter described having to heat her bathwater on the
stove after she woke several times to find only cold water flowing from
her tap.
“I understand that rent
goes up, cost of living goes up, everything goes up,” Cooper said. “But
with that, we would expect the quality of the building, and the quality
of the management, would stay the same, and that was not what we saw.”
Greystar did not respond
to questions about tenant complaints, except to say that resident
satisfaction was “very important” to the company.
Cooper and his fellow
tenants were experiencing firsthand the effects of a dramatic, though
mostly unnoticed, shift in control of a vital portion of America’s
housing stock, according to a first-of-its-kind analysis by ProPublica.
During the past decade,
private equity-backed firms such as Greystar have stormed into the
multifamily apartment market, snapping up rentals by the thousands and
becoming major landlords in American cities, according to ProPublica’s
analysis of National Multifamily Housing Council data on the nation’s
biggest owners of apartment buildings with five or more units.
Private Equity Firms Were Behind 85% of Freddie Mac’s Biggest Apartment Complex Deals
Private equity is now the
dominant form of financial backing among the 35 largest owners of
multifamily buildings, the analysis showed. In 2011, about a third of
the apartment units held by the top owners were backed by private
equity. A decade later, half of them were.
Private equity-backed
firms in the top 35 cumulatively held roughly a million apartments last
year, the analysis showed. That is likely an undercount, because private
equity giants like Blackstone, Lone Star Funds and others don’t
participate in the National Multifamily Housing Council’s annual survey.
Private equity firms often
act like a corporate version of a house flipper: They seek deals on
apartment buildings, slash costs or hike rents to boost income, then
unload the buildings at a higher price.
The influx of private
equity comes during a national affordable housing crisis and has dire
consequences, tenants and their advocates say. Such firms use economies
of scale to more aggressively squeeze profits from their buildings than
traditional landlords usually do, tenant advocates say. The firms’
tactics can include sharply increasing rent or fees and neglecting
upkeep. Sometimes landlords force out existing tenants and replace them
with those who can pay more.
The companies’ size allows
them to influence market rates and lobby against reforms that could
dilute their power. And their goals — quickly hiking a building’s
profits so they can sell it at a premium — are often at odds with those
of the tenants who need to live in them. In contrast, so-called
mom-and-pop landlords usually look for steady streams of rental income
over time while their buildings grow in value.
Another difference comes
in profits. Private equity firms boast about outsize returns, and the
most aggressive funds seek a profit of 20% or more on investors’
contribution, minus management fees. That compares to publicly traded
real estate investment trusts, which, on average, pay an annual dividend yield of 4.33% and allow investors to hold the value of the trust’s stock.
