Game of Homes

The private-equity firm Blackstone could be your next landlord.

Rebecca Burns, Michael Donley & Carmilla Manzanet March 31, 2014

Invitation Homes—a subsidiary of Blackstone—now owns more single-family homes than any other entity in the country. Here, an Invitation Homes for-rent sign in Chicago.

In a 2011 report, Mor­gan Stan­ley ana­lysts pro­claimed that Amer­i­ca was expe­ri­enc­ing a tran­si­tion from an own­er­ship soci­ety to a renter­ship soci­ety.” The com­bi­na­tion of falling home prices, lim­it­ed mort­gage cred­it, con­tin­ued liq­ui­da­tions and bet­ter rental options is fun­da­men­tal­ly chang­ing the way Amer­i­cans live,” says the report, con­clud­ing, We believe this change is only begin­ning.” For Wall Street firms, the Mor­gan Stan­ley report appears to have become a self-ful­fill­ing prophe­cy: See­ing a prof­itable open­ing in the wake of the fore­clo­sure cri­sis, invest­ment groups have worked dili­gent­ly to bring a renter­ship soci­ety” into being. Dur­ing the past two years, investors have bought approx­i­mate­ly 200,000 sin­gle-fam­i­ly homes, most­ly fore­clo­sures, in urban areas nation­wide, with plans to con­vert them into rental prop­er­ties. In Atlanta, one such invest­ment group pur­chased 1,400 homes on a sin­gle day in April of last year.

While the 'American Dream' of homeownership has always been an exclusionary one, out of reach for millions of people of color and working-class whites, a rental market controlled by Wall Street could easily turn out to be a nightmare for all.

This investor-led feed­ing fren­zy has sent home sales and prices ris­ing again, lead­ing some com­men­ta­tors to hail a robust hous­ing recov­ery.” But it’s one that’s hap­pen­ing large­ly with­out home­own­ers. In the final months of 2013, the rate of home­own­er­ship dipped to an 18-year low of 65.2 per­cent, down from a 69.4 per­cent peak pri­or to the 2007 finan­cial cri­sis, accord­ing to U.S. Cen­sus data.

Some com­men­ta­tors have chalked this trend up to itin­er­ant mil­len­ni­als who choose rent­ing over buy­ing as a mat­ter of pref­er­ence. But grow­ing num­bers of old­er Amer­i­cans are also find­ing them­selves rent­ing due to wrecked cred­it, con­tin­ued unem­ploy­ment or the inabil­i­ty to out­bid deep-pock­et­ed investors. And while the Amer­i­can Dream” of home­own­er­ship has always been an exclu­sion­ary one, out of reach for mil­lions of peo­ple of col­or and work­ing-class whites, a rental mar­ket con­trolled by Wall Street could eas­i­ly turn out to be a night­mare for all.

In the new renter­ship soci­ety, the largest land­lord of them all is the Black­stone Group—which, with $266 bil­lion in assets, is also the world’s largest pri­vate equi­ty firm. Through a sur­vey of Black­stone-owned rental homes in Chica­go, as well as inter­views with hous­ing advo­cates and pol­i­cy researchers, In These Times dis­cov­ered a slew of con­cerns relat­ed to this new investor-owned hous­ing stock. Ten­ants report poor con­di­tions and attempts to evade respon­si­bil­i­ty for main­te­nance that appear to vio­late city ordi­nances. More­over, hous­ing advo­cates wor­ry that investors’ long-term pres­ence in recov­er­ing neigh­bor­hoods will speed gen­tri­fi­ca­tion and shift the bal­ance of pow­er away from com­mu­ni­ties, to far­away Wall Street landlords.

The new land­lord on the block

Long a bête noire for pro­gres­sive activists because of its his­to­ry of buy­ing out trou­bled com­pa­nies and then ship­ping jobs over­seas, Black­stone began its for­ay into real estate in 2012, when it cre­at­ed a sub­sidiary called Invi­ta­tion Homes to pur­chase and man­age sin­gle-fam­i­ly rental homes. Invi­ta­tion Homes has since become the largest own­er of sin­gle-fam­i­ly homes in the Unit­ed States, spend­ing more than $7 bil­lion to gob­ble up 41,000 properties.

(Full dis­clo­sure: Two authors of this sto­ry, Michael Don­ley and Carmil­la Man­zanet, had a per­son­al encounter with Invi­ta­tion Homes last year when the com­pa­ny evict­ed them from the home they were occu­py­ing. Read that sto­ry here.)

Invi­ta­tion Homes claims on its web­site that by remov­ing vacant, fore­closed hous­es from the mar­ket, it is reduc­ing blight and pro­vid­ing a much-need­ed ser­vice for com­mu­ni­ties across the nation.” But Black­stone is backed by a host of com­pa­nies that bear direct respon­si­bil­i­ty for the fore­clo­sure cri­sis, includ­ing Mor­gan Stan­ley, CitiBank and Bank of Amer­i­ca. After first mak­ing mon­ey from the hous­ing bub­ble that crashed the econ­o­my, then ben­e­fit­ting from the fed­er­al bailout, banks and investors now stand ready to prof­it all over again by clean­ing up the mess they made.

They’re sit­ting on record amounts of cash,” says William K. Black, an asso­ciate pro­fes­sor of law and eco­nom­ics at the Uni­ver­si­ty of Mis­souri-Kansas City and a for­mer finan­cial reg­u­la­tor. Why not buy some­thing with it?”

At the height of Blackstone’s buy­ing spree, real estate agents in cities such as Phoenix and Atlanta, where home prices fell fur­thest, began notic­ing that busi­ness­men with suit­cas­es full of mon­ey were show­ing up and pick­ing the mar­ket clean at hous­ing auc­tions on behalf of Black­stone and oth­er investors, eas­i­ly out­bid­ding first-time home­buy­ers who weren’t able to put down 100 per­cent cash.

Now Blackstone’s pur­chas­es of emp­ty homes are pro­ceed­ing apace in more than 10 major met­ro­pol­i­tan areas in Atlanta, Chica­go, Las Vegas, Phoenix, north­ern and south­ern Cal­i­for­nia, Mia­mi, Orlan­do and Tam­pa, Fla.

Mean­while, rental demand is soar­ing as would-be home­buy­ers are squeezed out of the mar­ket. Add to that the 10 mil­lion peo­ple who lost their homes dur­ing the fore­clo­sure cri­sis, and Black­stone and its back­ers have a cap­tive mar­ket at their dis­pos­al, as they gra­cious­ly offer to rent fore­closed homes back to for­mer homeowners.

In many cas­es, vic­tims of fore­clo­sure are lit­er­al­ly rent­ing back their own hous­es, notes Rob Call, an orga­niz­er with Occu­py Our Homes in Atlanta. If Black­stone buys a house at an auc­tion, they may show up pret­ty much the next day,” he says. They’ll knock on the door and say, You can either rent the home you used to own, or we’ll evict you.’”

Big Finance’s bet on America’

Invi­ta­tion Homes has called its invest­ment strat­e­gy a bet on Amer­i­ca.” This may be a bit too much hon­esty, con­sid­er­ing the finan­cial aspect of the company’s oper­a­tions. In Octo­ber 2013, Black­stone part­nered with Deutsche Bank to offer a first-of-its-kind rental-backed secu­ri­ty” to Wall Street investors to the tune of $480 million.

If this sounds eeri­ly famil­iar, that’s because it is. Rental-backed bonds work essen­tial­ly the same way as the mort­gage-backed bonds that crashed the econ­o­my in 2008, except that they are ser­viced by month­ly rental checks rather than mort­gage pay­ments. Oth­er invest­ment com­pa­nies are now com­ing to the trough and prepar­ing to offer sim­i­lar rental-backed bonds. Finan­cial ana­lysts at Keefe, Bruyette & Woods esti­mate that the rental secu­ri­ti­za­tion mar­ket could bal­loon into a near­ly $1 tril­lion indus­try in the next six years.

On March 4, 75 hous­ing and con­sumer advo­ca­cy groups sent a let­ter to fed­er­al bank and hous­ing offi­cials, warn­ing of anoth­er bub­ble in-the-mak­ing and demand­ing fed­er­al inter­ven­tion. We are poised to expe­ri­ence anoth­er cri­sis if fed­er­al reg­u­la­tors fail to rec­og­nize and take cor­rec­tive action to address red flags that are all too famil­iar,” the let­ter cautioned.

Par­tic­u­lar­ly trou­ble­some is the fact that Blackstone’s secu­ri­ty assumes a 94 per­cent occu­pan­cy rate in the 3,000 prop­er­ties back­ing its first bond, a tar­get that rental estate pro­fes­sion­als say is extreme­ly challenging.

Already, there are signs that this high occu­pan­cy rate isn’t bear­ing out: Bloomberg report­ed in Feb­ru­ary that rents col­lect­ed on col­lat­er­al for the Black­stone secu­ri­ty declined by 7.6 per­cent from Octo­ber 2013 to Jan­u­ary, as a result of leas­es expir­ing or ten­ants exit­ing ear­ly. While sev­er­al major cred­it rat­ing agen­cies assigned Blackstone’s secu­ri­ty a ster­ling triple‑A rat­ing when it was rolled out in Octo­ber, Stan­dard & Poor’s cau­tioned in Feb­ru­ary that this acco­lade was pre­ma­ture, giv­en the infan­cy of the REO-to-rental secu­ri­ti­za­tion mar­ket. The inex­pe­ri­ence of new com­pa­nies in man­ag­ing large num­bers of rental prop­er­ties means that it’s still dif­fi­cult to gauge the pre­dictabil­i­ty of rental pay­ments, accord­ing to Stan­dard & Poor’s.

Indeed, an In These Times sur­vey of a por­tion of the 2,500 Black­stone-owned homes in the greater Chica­go area sug­gests high vacan­cy vates in homes pur­chased dur­ing the past year. Using data from the Cook Coun­ty Recorder of Deeds, In These Times iden­ti­fied approx­i­mate­ly 200 prop­er­ties in the city’s north­west neigh­bor­hoods acquired by Invi­ta­tion Homes dur­ing the past year. In Feb­ru­ary and March, In These Times sur­veyed 50 of these prop­er­ties and dis­cov­ered only 17 that were occu­pied. Invi­ta­tion Homes indi­cat­ed that it may take the com­pa­ny six to eight months to reha­bil­i­tate and rent out prop­er­ties, but declined to com­ment on the record about its occu­pan­cy rates. How­ev­er, 24 of the prop­er­ties sur­veyed had been acquired by Invi­ta­tion Homes at least eight months pri­or, and half of those were still unoccupied.

These and oth­er warn­ing signs have caught the eye of some pol­i­cy­mak­ers, but to lit­tle effect thus far. In Jan­u­ary, Rep. Mark Takano (D‑Calif.) wrote a let­ter to the House Finan­cial Ser­vices Com­mit­tee request­ing hear­ings on rental-backed secu­ri­ties. Prop­er over­sight of new finan­cial inno­va­tions is key to ensur­ing we don’t go down the same road of the unchecked sub­prime mort­gage-backed secu­ri­ty and cre­ate an unsus­tain­able bub­ble that will wreak hav­oc when it bursts,” he wrote. (As In These Times went to press, no hear­ings had been scheduled.)

Wall street slumlords

Rental-backed bonds aren’t the only aspect of Blackstone’s oper­a­tions that wor­ry hous­ing advo­cates. In cas­es where Invi­ta­tion Homes is actu­al­ly act­ing as a land­lord, the evi­dence so far indi­cates that it isn’t a very good one.

Anto­nio Her­nan­dez, 34, moved with his fam­i­ly into an Invi­ta­tion Homes-owned prop­er­ty in Chicago’s Bel­mont Cra­gin neigh­bor­hood in Feb­ru­ary 2013. He says the com­pa­ny has tried to shift most of the respon­si­bil­i­ty for main­te­nance of the home onto him. It doesn’t make sense that I would be respon­si­ble for some­one else’s home,” Her­nan­dez tells In These Times. Every­thing I do to take care of it adds val­ue for them, not for me.”

When Her­nan­dez began rent­ing from Invi­ta­tion Homes, he was also per­plexed by a sec­tion of his lease that says he must rent the prop­er­ty as is.” He isn’t the only one. In These Times obtained a copy of Invi­ta­tion Homes’ lease and pre­sent­ed it to Mark Swartz, legal direc­tor at the ten­ants’ rights orga­ni­za­tion Lawyers’ Com­mit­tee for Bet­ter Hous­ing, and Kel­li Dud­ley, direc­tor of the non­prof­it Resis­tance Legal Clin­ic. Both hous­ing attor­neys told In These Times that sev­er­al sec­tions of the lease vio­late Chicago’s Res­i­den­tial Land­lord Ten­ant Ordi­nance (RLTO), a long­stand­ing doc­u­ment that estab­lish­es the base­line of ten­ants’ rights and gov­erns most res­i­den­tial agree­ments in the city.

In response to inquiries from In These Times about the legal­i­ty of the lease giv­en to Chica­go ten­ants, Invi­ta­tion Homes spokesper­son Andrew Gal­li­na wrote in an e‑mail, Invi­ta­tion Homes com­plies with all fair hous­ing laws and reg­u­la­tions. We use stan­dard­ized leas­es adopt­ed by state and local real estate asso­ci­a­tions, which com­ply with local statutes.”

But Dud­ley notes, for exam­ple, that while com­mer­cial leas­es some­times say that ten­ants have to rent a prop­er­ty as is,” putting this stip­u­la­tion in a res­i­den­tial lease is a vio­la­tion of the RLTO, which clear­ly places the great­est respon­si­bil­i­ty for repairs on the land­lord. … [Invi­ta­tion Homes] is def­i­nite­ly over­reach­ing and try­ing to shift all the risk and the expense to the ten­ant,” she says. Swartz adds that the lease’s attempt to indem­ni­fy Invi­ta­tion Homes for any dam­ages, includ­ing those caused by its own neg­li­gence, vio­lates Illi­nois’ Land­lord and Ten­ant Act. He also points to sev­er­al oth­er sec­tions of the lease that are ille­gal under the RLTO, includ­ing a stip­u­la­tion that ten­ants must pay the asso­ci­at­ed fees in the event that Invi­ta­tion Homes employs an attor­ney to enforce an evic­tion or col­lec­tion of rent.

Her­nan­dez also says that since mov­ing in, he’s faced a slew of prob­lems with the home. Most recent­ly, he says, after Invi­ta­tion Homes ignored mul­ti­ple requests to fix a rail­ing in the base­ment, his moth­er-in-law fell down the base­ment stairs and hit her head.

Her­nan­dez also says that it is dif­fi­cult to reach per­son­nel with com­plaints and that he has had six dif­fer­ent prop­er­ty man­agers over the course of his year­long ten­an­cy. A forth­com­ing report from Occu­py Our Homes Atlanta and the Right to the City Alliance also found that while some Invi­ta­tion Homes ten­ants in Atlanta are giv­en a spe­cif­ic point per­son to relay con­cerns to, most receive only a phone num­ber and are asked to com­mu­ni­cate requests via voicemail.

Her­nan­dez’ expe­ri­ence resem­bles those of Invi­ta­tion Homes renters in oth­er cities who have com­plained that major plumb­ing and elec­tri­cal prob­lems have gone unad­dressed for weeks or months on end, accord­ing to a report by Ben Hall­man and Jil­lian Berman in the Huff­in­g­ton Post. Hall­man and Berman also spoke to for­mer Invi­ta­tion Homes employ­ees who told them that the high vol­ume of com­plaints and the wide geo­graph­i­cal dis­tri­b­u­tion of rental prop­er­ties amount­ed to a near-impos­si­ble feat for work­ers tasked with field­ing main­te­nance requests. Ten­ants rent­ing with Colony Amer­i­can Homes and Amer­i­can Homes 4 Rent, the two oth­er major investors-turned-land­lords, have report­ed sim­i­lar complaints.

When asked by In These Times about ten­ant com­plaints, Gal­li­na wrote, We pride our­selves on the afford­abil­i­ty and qual­i­ty of our prop­er­ties, the cus­tomer ser­vice we deliv­er and the pro­fes­sion­al man­age­ment we bring to the rental home indus­try. … When issues like the ones ref­er­enced are iden­ti­fied we work hard to quick­ly resolve them.”

Dud­ley, how­ev­er, is con­cerned that as large banks and investors increas­ing­ly take on the role of land­lords, the rights of ten­ants and home­own­ers are being increas­ing­ly tram­pled. (Full dis­clo­sure: Dud­ley is also han­dling the suit involv­ing Invi­ta­tion Homes’ evic­tion of two authors of this piece.) She says she first noticed this trend when han­dling fore­clo­sure cas­es in which home­own­ers had their pos­ses­sions put out on the curb by a bank before they had even been served with court papers. Such an action clear­ly con­sti­tutes an ille­gal evic­tion, but was wide­spread nonetheless.

We’re at risk of enter­ing a vig­i­lante soci­ety in which a pow­er­ful com­pa­ny can decide that it doesn’t like some­one being on its prop­er­ty for what­ev­er rea­son, come in, dis­pos­sess that per­son, take their things, kill their pets, and face con­se­quences that aren’t near­ly severe enough,” says Dud­ley. It’s a com­plete dis­re­gard of laws that took thou­sands of hours of work by advo­cates and leg­is­la­tures to devel­op. These com­pa­nies think they’re so pow­er­ful that they can undo all that.”

Indeed, Invi­ta­tion Homes has appeared to move quick­ly on evic­tions. Last Novem­ber, Her­nan­dez was sur­prised when an Invi­ta­tion Homes agent arrived at the end of the week to deliv­er him a five-day evic­tion notice. The com­pa­ny had asked him to switch to its online pay­ment sys­tem, but the sys­tem had failed to deduct his rent for that month. Though Her­nan­dez was able to rec­ti­fy the sit­u­a­tion, sim­i­lar expe­ri­ences in oth­er cities sug­gest high evic­tion rates among Invi­ta­tion Homes ten­ants. Accord­ing to a report in the Char­lotte Observ­er, Invi­ta­tion Homes filed evic­tion pro­ceed­ings against 10 per­cent of its renters in Char­lotte, N.C., dur­ing sev­er­al months in 2013. The report com­pares this to Cam­den Prop­er­ty Trust, one of the city’s largest land­lords, which ini­ti­at­ed evic­tion pro­ceed­ings against just 2.5 per­cent of its ten­ants in 2013. Some finan­cial ana­lysts have said that quick evic­tions may be part of Invi­ta­tion Homes’ busi­ness mod­el, thanks to the need to keep secu­ri­tized rental pay­ments flow­ing. (Invi­ta­tion Homes declined to com­ment on the record about its evic­tion rates).

The prospect of large num­bers of ten­ants left at the mer­cy of a far-removed firm con­cerns hous­ing advo­cates. While labor activists have long bemoaned Blackstone’s strat­e­gy of buy­ing out com­pa­nies and then refus­ing to acknowl­edge respon­si­bil­i­ty for wors­en­ing con­di­tions — a prob­lem labor reporter Josh Eidel­son refers to as, Who’s the boss?” — Blackstone’s place at the head of a hous­ing empire may now raise a new ques­tion: Who’s the landlord?”

Black­stone neighborhoods?

Invi­ta­tion Homes says on its web­site that by remov­ing dis­tressed inven­to­ry from the mar­ket, it is con­tribut­ing to the hous­ing recov­ery by stim­u­lat­ing economies in areas hard­est hit by the hous­ing crisis.”

Hous­ing orga­niz­ers beg to dif­fer, not­ing that while Black­stone may be buy­ing in cities where prices fell the fur­thest as a whole, they’re avoid­ing the hard­est-hit neigh­bor­hoods in com­mu­ni­ties of col­or, instead focus­ing on sub­ur­ban enclaves or areas where rents are already on the rise. Advo­cates wor­ry that the heavy investor pres­ence in the rental mar­ket will send gen­tri­fi­ca­tion into over­drive in recov­er­ing neigh­bor­hoods. It’s basi­cal­ly a mas­sive land grab,” says Occu­py Our Homes orga­niz­er Rob Call.

In response to crit­i­cism, Black­stone has insist­ed that it pro­vides afford­able hous­ing, writ­ing on its web­site that its aver­age rents per square foot in our sin­gle fam­i­ly homes are approx­i­mate­ly 30 per­cent below com­pa­ra­ble mul­ti­fam­i­ly rents.”

How­ev­er, com­par­ing rents to rents may be miss­ing the big pic­ture, giv­en the pos­si­bil­i­ty that Black­stone and oth­er investors are lock­ing would-be home­buy­ers out of the mar­ket: Those priced out of home­own­er­ship still gen­er­al­ly pay more in month­ly rent than they would in mort­gage pay­ments, accord­ing to data from the real estate web­site Trulia. 

And while Invi­ta­tion Homes rents vary wide­ly by neigh­bor­hood and city, some stud­ies sug­gest that the heavy con­cen­tra­tion of investor-owned hous­ing is already hav­ing a detri­men­tal impact on afford­able hous­ing. A report from DePaul University’s Insti­tute for Hous­ing Stud­ies found that the rapid growth in investor-owned sin­gle-fam­i­ly hous­ing may be one fac­tor fuel­ing a widen­ing gap between the sup­ply and demand for afford­able rental hous­ing in Chica­go and the sur­round­ing sub­urbs, giv­en that the medi­an rents in sin­gle-fam­i­ly-home rentals are 41 per­cent more expen­sive than those in oth­er types of rental prop­er­ties, once util­i­ties are fac­tored in.

More­over, as the stock of vacant homes dwin­dles, investor-land­lords may seek to raise rents in order to pass the increas­ing costs of acquir­ing homes onto ten­ants, notes a Feb­ru­ary 2014 report from the Cen­ter for Amer­i­can Progress. The report also pre­dicts that Invi­ta­tion Homes could raise rents if over­all occu­pan­cy rates aren’t being met, in order to con­tin­ue mak­ing month­ly pay­ments to bond­hold­ers. Man­ag­ing port­fo­lios of tens of thou­sans of sin­gle-fam­i­ly rental homes across the coun­try may be more expen­sive than most insti­tu­tion­al investors have planned,” Sarah Edel­man, the pri­ma­ry author of the report, tells In these Times. These expens­es, along with increas­es in home prices, could put upward pres­sure on rents as oper­a­tors try to deliv­er the returns on invest­ment they have promised.” Her­nan­dez says his rent was raised by $200, an 11 per­cent increase, between the first and sec­ond year of his ten­an­cy — more than dou­ble the aver­age increase in Chica­go rents between 2013 and 2014, accord­ing to Trulia.

The Uni­ver­si­ty of Mis­souri-Kansas City’s William K. Black also wor­ries about the impact that investor-owned hous­ing will have on neigh­bor­hoods as a whole. He sug­gests that groups like Black­stone may try to low­er their prop­er­ty tax­es by reduc­ing the appraisal val­ues for the homes they own — which could drain city cof­fers. That’s a big hit in par­tic­u­lar areas where they’re buy­ing thou­sands of homes,” says Black. You can imag­ine what that’s going to do to the bud­get, for things like school districts.”

This sce­nario is already play­ing out in Huber Heights, Ohio, where the hedge fund Mag­ne­tar Cap­i­tal LLC bought up a third of all rental prop­er­ties, then pro­ceed­ed to apply for the largest reduc­tion in res­i­den­tial prop­er­ty tax­es in the county’s his­to­ry,” accord­ing to Bloomberg. The local school board is fight­ing to block the reassess­ment, which could slash up to $800,000 from the edu­ca­tion budget.

Black notes that the func­tion Black­stone is per­form­ing, of rehab­bing homes and mak­ing them avail­able again, could also be per­formed by gov­ern­ment agen­cies or com­mu­ni­ty orga­ni­za­tions. By rely­ing on Black­stone to lead com­mu­ni­ties to recov­ery,” Black says, the poten­tial is there for investors to accrue too much influ­ence: Will their eco­nom­ic pow­er begin to trans­late to polit­i­cal pow­er through crony­ism?” he asks.

For these rea­sons, activists believe that a fight against Black­stone could be the next front in the bat­tle for the right to the city.

This is a game-chang­er,” says Call. These com­pa­nies are offer­ing their solu­tion, which con­sol­i­dates pri­vate own­er­ship into the hands of Wall Street. … This is a real oppor­tu­ni­ty for com­mu­ni­ty groups to act and pro­vide an alternative.”

Want to learn more? Read about some of those alter­na­tives here.

Michael Don­ley and Carmil­la Man­zanetare hous­ing activists in Chica­go. Rebec­ca Burns is a staff writer for In These Times. Read more of her work here.
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