The bursting of the U.S. housing bubble in 2008 upended the lives of millions of Americans, with many people yet to recover the wealth they lost in the Great Recession. But for private equity firms, hedge funds and real estate investment trusts, the crisis offered up a smorgasbord of foreclosed homes that could be bought for less than what they cost to build.
Now, one of the leaders in the consolidation of the home-rental market, Blackstone Group, is preparing what could be one of 2017's first initial public offerings by a U.S. company, according to news reports. The New York private equity firm will soon float stock in Invitation Homes, its Dallas-based subsidiary that since 2012 has spent an estimated $10 billion buying up about 50,000 homes across the country. Many of these homes are clustered in markets that were hit hardest by the housing crisis, including Phoenix, Atlanta and Las Vegas, effectively turning Invitation Homes into a mega landlord in these cities.
The IPO will be the third one for a company that securitizes U.S. home-rental revenue. In 2013 American Homes 4 Rent became the first company to sell stock backed by rents collected from single-family homes. Starwood Waypoint Residential Trust (now known as Colony Starwood Homes) went public in 2014 and is now the nation’s third-largest landlord.
After Invitation Homes goes public, roughly 150,000 homes across the United States will be beholden to the growth expectations of the boardroom executives and shareholders of just three companies. The IPO comes as home prices have reached all-time highs and investors are betting that the rental market will remain robust for years to come. Meanwhile, rent is rising at nearly double the pace of core inflation while wages continue to grow at a slower pace than they did before the recession. This is putting pressure on lower-income renters who are generally facing more competition from people who lost their homes.
The consolidation of rentals among big rental companies is raising alarm bells for housing rights advocates, more so now that a real estate magnate with a sketchy record on fair housing is becoming the next president of the United States. Donald Trump’s victory in the Nov. 8 election has given these landlords a potential ally in someone who will be in charge of federal agencies responsible for ensuring fair housing practices. Trump, who in 2008 said he hoped for a housing crash because it would be a good business opportunity, has turned to Blackstone co-founder chairman and CEO Stephen Schwarzman to chair a strategic and policy forum, with a group of business titans that include General Motors CEO Mary Barra and Doug McMillan, head of Wal-Mart Stores, to advise the incoming president.
“The fact that we have an administration that’s saying Blackstone should be involved in directly creating our policies, for us it’s the fox in the henhouse,” Tony Romano, organizing director of low-income renters advocate Right to the City Alliance, told Salon. “We call Trump the ‘evictor-in-chief’ or the ‘gentrifier-in-chief.’ He made his money off gouging people with high rents, so it’s not surprising he’s putting cohorts in the real estate market into positions of power.”
A 2014 report by Right to the City claimed that tenants of Invitation Homes properties in Atlanta, Los Angeles and Riverside, California, were often paying rents that exceeded U.S. Department of Housing and Urban Development’s fair market rent assessments for their areas and that rent increases on lease renewals were as high as 53 percent in some cases. The group also argued that the long-distance relationship between tenant and landlord fostered by these consolidations means tenants have a harder time convincing landlords to perform routine maintenance.
“It’s true that smaller-scale single family home landlords have a personal relationship with their tenants,” Alex Schwartz, professor of urban policy at The New School in New York City, told Salon. “Smaller scale landlords could also mean more flexibility, a desire to keep tenants in place, so the rents don’t go up to the same degree.”
Blackstone chief Schwarzman (who once compared President Barack Obama’s proposal to raise taxes on private equity firms to the invasion of Poland by the Adolf Hitler in 1939) hasn’t commented on the Invitation Homes IPO. But last year he told The Wall Street Journal that higher lending standards imposed in the wake of the recent mortgage-lending meltdown led his firm to enter the home rental market. Another Wall Street Journal story earlier this month pointed out that Blackstone and other large landlords have focused on buying rental properties in good school districts because tenants in those areas would be more willing to accept rent hikes in order to prevent relocating their children.
For Blackstone and its rivals, creation of this new asset class of home rental-based securities represents a test — to see if the market will embrace this type of investment as much as it has securities backed by mortgages. The stock prices of American Homes 4 Rent and Colony Starwood Homes have risen 20 percent and 28 percent, respectively, since the start of the year. But the companies aren’t profitable, which puts greater pressure on the them to raise revenue (rent) and lower costs (maintenance). American Homes 4 Rent lost $48 million on $558 million in revenue in its last fiscal year, according to its regulatory filing. Colony Starwood Homes didn’t fare much better; it lost $44 million on $272 million in revenue last year.
“On an operational basis, these companies are bleeding,” Wolf Richter, publisher of Wolf Street, a finance and economic website, told Salon. “The original investors who sold these companies to the public — they made a ton of money on these homes. And these stocks are trading above their IPO value right now. But their operational performance is terrible.”
But these companies own billions of dollars’ worth of assets, Richer pointed out, and so investors are looking for an eventual payout if these companies begin selling homes.
None of this bodes well for the people who are spending more and more of their income on rent. But for Wall Street, gentrification has becoming a new and lucrative financial instrument.