TL;DR: Are corporate landlords the real culprits behind soaring housing prices? Our deep dive into the data suggests a more complex reality. While these investment firms are an easy target, they account for only a fraction of the issue. The real elephant in the room? A woeful lack of housing supply fueled by skyrocketing land and construction costs, outdated zoning laws, and more. In the latest article from The Medici Project, we unpack the myths, scrutinize the numbers, and spotlight where public discourse should really be focusing when talking about America’s sky-high housing costs.
The Rent is How Much?! - The Cost of Housing.
The cost of housing in the USA is expensive—really expensive. Over the last six decades, purchasing or renting a home has become increasingly burdensome, with prices rising significantly relative to median income. According to research conducted by Pew, the cost to buy a home for an average American family has jumped from 2.7 times the median income in the 1960s to 5 times the median income today. In that same time frame, rent as a percentage of median household income has increased from 25% to 35%, according to the US Census taken in 2020.
As you might expect, the issue is more pronounced in cities, where housing regularly consumes nearly 10% more of income than in rural areas. This has historically been driven by the constant population shift from rural to urban living, which continued from the late 1700s to the 2010s.
In recent years, people have been starting to panic, and have looked to find answers as to why the price of housing has been so explosive. Theories have ranged from the rise of Airbnb to the latent impact of suburbanisation and parking minimums. But possibly the most sinister theory as to the source of these price hikes is the relatively new (and secretive) industry of corporate landlords. In this article, we are going to spend some time unpacking corporate landlords to see, to what extent, they are to blame for America's housing woes.
Corporate Landlords - The What, When, and Why.
Corporate landlords are companies, or more commonly funds like Private Equity Funds or Real Estate Investment Trusts, that purchase buildings with the intention of renting them out for a profit. Typically, this is done to create an investment product for institutional investors—think of your 401(k)—or for private investors, who are wealthy individuals looking to diversify their investments into real estate without the hassle of managing the properties themselves. The most notable corporate landlords you've probably heard of include Avalon Bay, Invitation Homes, and most (in)famously, Blackstone—often confused with BlackRock.
Corporate landlords aren't a particularly new concept in the apartment space. Funds, companies, charities, and governments have been building, buying, and renting apartment complexes for ages. Sometimes the aim is to house a specific workforce or population, but more commonly in our era, the goal is to provide apartment-style housing in urban areas to people from all economic backgrounds.
Over recent years, the presence of corporate landlords in the U.S. has grown, increasing to 29% of all rentals in 2020 from 24% in 2010. However, the vast majority of apartment buildings in the U.S. are still either owner-occupied (i.e., owned by a cooperative with some rentals available) or lived in by a single owner who rents out the remaining units. They may also be owned by small-time investors, traditionally referred to as "Mom & Pop" landlords. What has changed recently—and what is arguably much more interesting—is the surge of corporate landlords in the single-family suburban home market. Various reports have found that corporate landlords owned around 21% of all single-family rental homes in the United States in 2022, up from 14% in 2012. Before the 2008 financial crisis, this number was only around 8%. That's a growth of 163% in less than 20 years!
The expansion of corporate landlords in the single-family home market has been driven by several factors:
The increasing availability of capital for investment in real estate;
A decade of low interest rates, commonly referred to as "cheap money;"
Heightened regulatory burdens making "Mom & Pop" investing more difficult; and
The growing demand for single-family rental housing as more people find themselves unable to afford homeownership but still desire a single-family house to call home.
Panic In The Forum - The Public Reaction.
As you might expect, this precipitous rise in corporate landlordism within the single-family sector has not gone without criticism. Many argue that corporate landlords are inflating rents and home prices, making it increasingly difficult for people to save for a down payment and buy a home. Essentially, they contend that Reason 4 above is a direct result of Reasons 1-3. Others claim that corporate landlords don't provide the same level of maintenance and care as "Mom & Pop" landlords do, leading to lower-quality rentals and a resurgence of "tenement-like" conditions.
In an attempt to address the public outcry, several politicians have introduced legislation aimed broadly at regulating corporate landlords. The goals are twofold: A) to reduce the attractiveness of single-family home and small-apartment investments for these investor groups, and B) to provide more robust tenant protections. For instance, in 2021, the city of Portland, Oregon, passed a law requiring corporate landlords to be more transparent with tenants about rent increases and maintenance issues. That same year, a group of tenants in California filed a class-action lawsuit against a corporate landlord, accusing the company of unfair and deceptive practices like raising rents without adequate notice and neglecting property maintenance.
In 2022, Seattle joined the legislative movement by passing a law requiring corporate landlords to furnish tenants with more information about their rental history, such as the number of times they've evicted people. Fast-forward to 2023, and the state of New York is now contemplating legislation that would cap the amount corporate landlords can raise rent each year.
So, Corporate Landlords Are To Blame?
Not so fast. Despite the intense public focus on investment firms like Blackstone (again, that's Blackstone, not BlackRock), the evidence supporting the argument that they are largely responsible for housing unaffordability is relatively shaky. The question, "To what extent are corporate landlords removing properties from the single-family housing market and affecting the price of housing nationally?" is far more nuanced than our initial data set suggests.
For starters, while it's true that corporate landlords have increasingly cornered more of the single-family rental market (as well as the broader apartment rental market), they currently own only about 21% of all single-family home rentals in the USA. Furthermore, the growth of rentals as a percentage of the single-family home market has been relatively slow, increasing just 30% over the past 50 years (22% in 2020 from 17% in 1970). This hardly represents the "en-masse" conversion of single-family homes from purchasable properties to rentals that many home advocacy groups claim is happening.
In discussions on this topic, the variable of locality often gets overlooked. Even though corporate landlords may be buying up homes in certain areas, they largely ignore others, particularly rural regions where populations have generally been decreasing over the past half-century.
So, while it's accurate to say that an additional 5% of all single-family homes have become rentals over the past 50 years—effectively removing them from the resale market—that 5% shift alone cannot account for the 70% increase in the housing-to-income ratio over the same period. To find the answer, we need to consider additional factors.
The Real Culprit - Housing Supply and Building Starts.
Simply put, the stomach-churning rise in housing prices boils down to a fundamental issue of supply and demand. The main culprits are: A) not enough new homes being built over the past five decades, and B) this lack of construction happening in areas with increasing populations.
New home construction in the U.S. peaked in the 1970s and declined steadily until the 2010s, when it rebounded slightly. This decline can be attributed to two main factors: first, the rising cost of land, and second, the escalating cost of construction. Both of these have increased significantly from the 1970s onward. Below is an inflation-adjusted table illustrating the costs from 1970 to the present.
ADJUSTED COST OF LAND PER ACRE (USD)
ADJUSTED COST TO BUILD PER SQ FT (USD)
*Data obtained from the U.S. Census Bureau for land costs and the National Association of Home Builders for construction costs.
As the data shows, the cost of building has soared by 383%, and the cost of land has jumped by 500% nationally. Keep in mind that these figures are national averages, and costs in high-demand areas like New York City and San Francisco are likely even higher. Consequently, not only has building become less frequent since the 1970s, but when construction does occur, companies must charge more to account for these increased costs. This, in turn, results in higher new-build resale prices or pricier rentals in newly-constructed buildings. So, when you hear someone say, "They don't build them like they used to," they're right; it's simply not financially feasible anymore.
While this article doesn't have the scope to delve into all the various factors that have slowed new construction starts and elevated housing prices, here are some additional culprits worth thinking about:
The surge in construction and environmental regulations from the 1970s to today, which directly account for around 10% of all new construction costs (and indirectly account for even more);
The increased availability of mortgages, fueled by government programs like the FHA's first-time buyer program, which adds leverage (mortgage debt) to the market and drives up prices;
A rise in prosperity throughout the 20th century, leading many to purchase second homes, further limiting supply at a time when less construction was happening;
Regulations that favor single-family home construction over more efficient housing styles, mandate minimum parking requirements, and prohibit cheaper alternatives like boarding houses;
A shift in American expectations regarding home sizes and amenities, which have grown significantly, leading to new builds being 61% larger than they were 50 years ago, thus considerably increasing construction costs.
And there are undoubtedly more factors that we've not had the space to discuss!
The Consequences of Misattribution - Why Does This Matter?
The misdirection of blame towards corporate landlords for the housing crisis carries several implications that obstruct actual solutions. Let's break down why this misattribution matters:
1. Pointing at the Wrong Culprit
Corporate landlords are convenient scapegoats—large, faceless entities seemingly profiting off a national crisis. When criticized, their often dispassionate responses don't win them any sympathies. However, let's not forget that these entities are significant contributors to pension and 401(k) plans, which are vital for the average American's financial security in retirement. By focusing on them, we miss the actual causes of the housing crisis, inadvertently protecting the real culprits from scrutiny.
2. Undermining Credible Arguments
Blaming corporate landlords not only sidetracks the conversation but also undermines valid arguments for systemic change. Critics waving the red flag at corporate landlords risk creating a "boy who cried wolf" scenario. When well-meaning politicians and advocates perpetuate a narrative not supported by data, they weaken their other arguments—arguments that might otherwise be persuasive and backed by facts. Consequently, it's crucial to pick battles wisely, ensuring the issues you're vociferously advocating for are actually substantiated by evidence.
3. Obscuring the Real Issue
Every minute spent lambasting corporate landlords in the media or legislative chambers is a minute lost in addressing the real issue at hand: the need for more housing. The data overwhelmingly supports the idea that we're dealing with a supply and demand imbalance. While solving this issue is complex, some solutions are relatively straightforward:
Update Zoning and Housing Regulations: Modernize these laws to promote the construction of efficient, multi-unit buildings.
Incentivize Living in Less-Populated Areas: Encourage people to move to less expensive, less populated regions, and provide the necessary resources to make such transitions successful.
Promote Skilled Trades: Encouraging more people to enter trades can bring down construction costs, making housing more affordable.
Eliminate Parking Minimums: Remove mandates that require builders to allocate precious land for parking spaces, enabling more efficient use of land.
And the list goes on.
Finding The American Dream - How We Get Back To Normal.
To sum it up, while corporate landlords have undeniably grown in prominence, they are not the monolithic villains many perceive them to be—at least not at the present moment. Rather than dwelling on scapegoats, our attention needs to pivot toward tackling the actual issues contributing to the housing crisis, chiefly, the urgent need for more housing.
Encouragingly, we're beginning to see some targeted efforts aimed at addressing the root causes of the housing crisis. California has already mandated all jurisdictions to draft plans for adding 2.5 million housing units by 2030. This ambitious plan is incentivizing builders by offering relaxed regulations for those allocating at least 20% of their projects to affordable housing. Similarly, New York City is streamlining conversion rules, making it easier to repurpose older commercial & industrial buildings into residential units. The aim is to add approximately 20,000 new units in the next few years.
The changing nature of work culture, particularly the rise of remote work, could further alleviate housing pressures. The Brookings Institute reports an 11% decline in the number of people migrating from rural to urban areas between 2010 and 2020. If this trend sustains, or even intensifies, we could see a dual benefit: reduced strain on overpopulated urban centers and a revival of economically stagnant rural areas—a win-win scenario.
While it's too soon to declare these initiative and trend changes a success or to predict their unintended consequences, it's encouraging to witness state and local governments starting to address this issue with substantive measures, and people taking their own initiative to live a more comfortable life in the various amazing backwoods this country has to offer.
Instead of engaging in blame games and further delaying progress, it seems we are finally steering the discourse toward viable solutions. By focusing our collective energies on meaningful, data-backed strategies (at a personal or governmental level), we stand a better chance of grappling with the real demons of our housing crisis, and not just kicking the can down the road, waiting for it to hit a landmine.