Institutional players in the single-family rental (SFR) market have been expanding their reach into select American neighborhoods since the global financial crisis of 2008, but they now find themselves in an uncomfortable limelight.
They are under scrutiny in Congress and accused of gentrifying minority neighborhoods and allegedly displacing large numbers of people of color — Black residents in particular.
That is a major takeaway in a Congressional subcommittee report on a recent survey of the nation’s five largest institutional owners and operators of SFR homes. The survey, sponsored by the Democrat-controlled U.S. House Financial Services Committee’s Subcommittee on Oversight and Investigations (the subcommittee), was sent to the following companies: Invitation Homes; American Homes 4 Rent; FirstKey Homes (owned by Cerberus Capital Management); Progress Residential (owned by Pretium Partners); and Amherst Residential.
As of the end of the third quarter of last year, according to the report, those five companies owned a total of 280,637 single-family rental properties.
“To fund their acquisitions, companies raise billions of dollars in capital from hedge funds, pension funds, ultra-high net worth individuals, and other institutional investors, who such companies consider to be their customers,” the House subcommittee’s report on its survey findings state. “The ability of SFR companies to purchase homes with cash provides a competitive advantage.”
The financial muscle of these institutional SFR companies also is revealed in securitization deals tracked by Kroll Bond Rating Agency (KBRA). The bond-rating agency’s data shows that so far this year, institutional players — including companies like Progress Residential, FirstKey Homes and Tricon Residential — have undertaken total of 11 private-label SFR securitization deals involving some $8.2 billion in corporate notes secured by a total of some 27,200 rental properties, primarily single-family dwellings.
“Despite the growing appetite for SFR investments, institutional equity ownership in the overall SFR market today is still estimated at only around 2%,” a market insight report from MetLife Investment Management (MIM) states. “MIM believes [however] that institutional SFR ownership is likely to grow significantly over the next decade.
“MIM’s analysis indicates that simply moving institutional ownership of SFR from 2% today to 10% [of the investment-property market] in the future will result in a need for over $200 billion in incremental debt financing.”
Today, the bulk of second homes and investment properties nationwide are still owned by smaller real estate firms and so-called “mom-and-pop” investors. Critics of the institutional SFR companies, however, point out that those national figures distort the concentrated nature of the problems created by the “Wall Street” investors.
“Securitized SFR homes are heavily clustered in the Sunbelt, which comprises the Southeastern, Southwestern and Western U.S. region, and in communities that previously experienced high foreclosure rates following the 2008 financial crisis,” the House subcommittee’s report on its findings states. “For example, in the third quarter of 2021 alone, institutional investors bought 42.8% of homes for sale in the Atlanta metro area and 38.8% of homes in the Phoenix-Glendale-Scottsdale area.”
The House subcommittee punctuated its survey results by holding a public hearing recently — on Tuesday, June 28 — titled “Where have all the houses gone? Private equity, single-family rentals and America’s neighborhoods.”
“Today’s hearing will examine troubling issues regarding the mass predatory purchasing of single-family homes by private-equity firms, including the adverse impact predatory purchasing has had on first-time homebuyers, the working class and people of color,” said U.S. Rep. Al Green, D-Texas, chairman of the House subcommittee, in his opening remarks. “…These private-equity firms have the advantage of being able to purchase these homes with cash; therefore, they easily out-compete individual buyers who may require loans. This all has the troubling effect of displacing residents of color and leading to gentrification of these communities.”
The major findings of the House subcommittee’s survey of the five leading institutional SFR companies, coupled with data from the U.S. Census Bureau’s American Community Survey, are as follows:
- The five SFR companies expanded their housing stock between March 31, 2018, and September 30, 2021, by 27% — with a total net property gain of 76,235 single-family homes.
- They also tended to acquire homes in neighborhoods with Black populations significantly greater than the national average. “The average population represented across the companies’ top 20 zip codes was 40.2% Black, which is over three times the Black population in the U.S. (13.4%),” the House subcommittee’s summary of the survey findings state.
- The companies also tended to purchase homes in areas with lower home prices but higher rents. “The average median gross rent in the five companies’ 20 top zip-code tract areas ($1,259) was approximately 13% above the national median ($1,096),” the House committee’s report states.
- The companies also increased fees per lease by 40% over the survey period — from $147.20 in 2018 to $205.29 in 2021.
- And, finally, the House subcommittee reported that the “total number of tenants behind on rent and fees increased by almost two-fold [over the survey period], with tenants with rental arrears increasing from 11.3% in 2018 to 19.1% in 2021, and the number of tenants with fee arears increasing from 10% in 2018 to 20.7% in 2021.”
Witnesses called to testify before the subcommittee in the hearing held last week were vocal in their concerns over the growing influence of Wall Street-backed SFR companies.
“Just over a decade ago, no single landlord owned more than 1,000 homes,” said Jim Baker, executive director of the Private Equity Shareholder Project, one of five witnesses who testified before the subcommittee on June 28. “Now the top five [institutional SFR players] … together own or operate almost 300,000.”
Shad Bogany, a real estate broker with Better Homes and Gardens Real Estate in Houston, said these institutional SFR buyers are targeting minority communities because historically such neighborhoods are undervalued and have lower-priced homes. This practice, he claimed, “drives up the prices for [existing] residents,” making “the dream of homeownership for the population unachievable.”
“Homebuyers are having to compete with investors that are paying in cash over the list price, resulting in an increase in investor purchases,” Bogany said. “Investors are creating a generation of renters who will miss out on the benefits of homeownership and the ability to create wealth and stabilize communities.
“By increasing the percentage of renters in the black community, the institutional investors are creating a modern-day sharecropping colony,” Bogany added. “It reminds me of my ancestors’ history over 100 years ago, when you lived on the land, you have a place to stay, but all your hard work and money goes to benefit someone else.”
Another witness at the subcommittee hearing, Sophia Lopez, deputy campaign director of housing at the Action Center on Race and the Economy (ACRE), which describes its mission as organizing at the intersection of race and Wall Street accountability, said the large institutional SFR companies have “five core practices.”
They are, she explained: 1.) imposing large rent increases; 2.) adding large fee increases; 3.) failing to do adequate maintenance; 4.) employing aggressive eviction practices; and 5.) making use of convoluted ownership structures that “leave tenants unsure who really owns their home and to whom to appeal when problems arise.”
Elora Lee Raymond, an assistant professor at the Georgia Institute of Technology, who also testified at the subcommittee hearing, said her research shows that neighborhoods in Atlanta where institutional SFR buyers were active “lost 166 more Black residents than adjacent neighborhoods.”
“These purchases led to long-term gentrification of Black communities out of Atlanta,” she added. “…In a recent study of Tampa, Miami and Atlanta, my co-authors and I found that institutional investors bought one in six of all single-family rentals last summer. In Atlanta alone, institutional investors bought over half of the single-family rentals and 17% of all single-family homes.”
David Howard, executive director National Rental Home Council (NRHC), a nonprofit trade association representing the SFR industry, contends institutional SFR companies are playing a positive role in the nation’s housing market. In a statement provided to the subcommittee, he said: “There is not one state in the country where NRHC member companies own more than 1% of the housing, and in 23 states NRHC large member companies don’t own any properties at all. Even in metropolitan areas where NRHC member companies own higher numbers of properties, they still account for only a small share of the overall housing and rental housing: just over 1.5% of the housing in Atlanta, 2% in Charlotte, 1.3% in Houston, and 0.5% in Kansas City.”
Howard said there is a greater need for quality, affordably priced housing in the United States today than there has been in decades, “and single-family rental home providers are an important part of the solution.”
In the statement provided to the subcommittee, Howard cited a study by Harvard’s Joint Center for Housing Studies in April 2022. He claimed the study showed that large institutions (entities owning 1,000 or more properties) are not concentrating their portfolios or property acquisitions in minority communities. However, the study concluded that rates of rental housing ownership by corporate entities vary considerably at both the metropolitan and neighborhood level “and are consistently higher in neighborhoods with larger shares of Black residents.”
On the same day as the hearing last week, June 28, Progress Residential issued a press release highlighting the positive impact of its SFR purchases and upgrades on local economies across the country.
“As members of the very communities we serve, a hallmark of our company culture is making a positive local impact,” said Adolfo Villagomez, chief executive officer of Progress Residential. “Over the last decade, Progress Residential has been a significant economic driver in each of our markets, and we look forward to continuing to build on our efforts for many years to come.”
Among the positives highlighted by Progress Residential:
- Renovating 100% of homes at the time of acquisition or vacancy, with some $21 billion invested in U.S. homes since its founding in 2012.
- Paying more than $707 million in taxes over the past 5 years.
- Serving the housing needs of 520,000 residents.
- Investing $50,000 per home on average over the past 5 years.
- Employing some 2,500 people.
- Building more than 2,600 new homes.
Jenny Schuetz, a fellow at the Brookings Institute and another witness who testified at the House subcommittee hearing, stressed that “rentals are an important part of the housing ecosystem.”
“Homeownership is not the preferred choice for all Americans or at all points in any person’s life,” she said. “Having a diverse set of tenure choices and structure types in diverse neighborhoods is important for economic opportunity.”
She suggested that Congress can improve the wellbeing of renters and homebuyers alike through “four channels.”
- Working with state and local governments to expand the supply of housing, particularly moderately priced rentals and for-sale homes.
- Relieving financial stress for low- and moderate-income households by expanding housing voucher programs and the renewing the expanded child tax credit.
- Providing resources to state and local governments to ensure housing quality and tenant protections.
- And, ensuring better data collection to increase transparency of rental-property ownership.
“There are no silver bullets to make housing cheaper and more abundant overnight,” Schuetz stressed. “Helping renters and homebuyers will require sustained and coordinated policy efforts from federal, state and local governments.”
The House subcommittee’s report on its survey findings, however, raises the concern that absent some adjustment of course soon, the impact of the Wall Street investors on Main Street housing could well be the permanent displacement of many of the nation’s most vulnerable families, particularly in communities of color.
“The survey data shows that the average income of these five [institutional SFR] companies’ tenants increased by 9% between 2018 and 2021,” the House subcommittee’s report states. “On the surface, this may seem like existing tenants grew their income during that time-frame.
“However, this shift may instead signal turnover of lower-income tenants and a restriction of the companies’ renter-eligibility criteria. A tightening of the tenant credit box would make these five companies’ single-family rental homes less accessible to tenants with lower incomes and further limit affordable housing options for the U.S.’s lowest-income families.”
Lopez of ACRE is blunt in her assessment of the problem, and the solution.
“Make no mistake about it: These companies engage in equity stripping,” she said, referring to institutional players in the SFR market. “…These companies make the wealth gap worse because they buy homes in communities [including predominately Latino or Black neighborhoods] … and transfer [that wealth] to shareholders.
“That’s the exact same thing that happened during the foreclosure crisis [that marked the 2008 housing-market collapse]. We need to do everything that we can to make sure that that wealth stays local and continues to support [the local] community.”