Atlanta as a Private Equity “Strike Zone” in Wall Street’s Single-Family Rental Boom

Excerpted from Red Hot City: Housing, Race, and Exclusion in Twenty-First Century Atlanta by Dan Immergluck, published by the University of California Press. © 2022. Reprinted by permission.

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[Increasingly, urban families rent their homes from private equity firms. This excerpt from a new book by housing expert Dan Immergluck, using Atlanta as a backdrop, sets forth how, aided by the federal government, this shift took hold after the Great Recession of 2007-2009—saddling tenants with higher rents, less landlord service, and increased eviction rates. In coming months, NPQ will explore community ownership strategies that are being developed in response to these trends.]—Steve Dubb

In the wake of the foreclosure crisis, millions of single-family homes across the U.S. flowed into the hands of investors. While some of these were then resold to homeowners, many were converted into single-family rental (SFR) housing. In the Atlanta region, most SFR investors were small, “mom and pop” landlords who own anywhere from one to about twenty rental properties in the region. This had been, and in many communities still is, the predominant nature of investment in single-family rental homes, especially in lower-income neighborhoods throughout the country. In fact, in the Atlanta metro, SFR homes had been, before the foreclosure crisis, predominantly located in low and moderate-income neighborhoods. In many middle- and upper-income neighborhoods, rental housing was often scarce, and where it did occur was usually concentrated in large-scale multifamily apartment buildings, often located outside of single-family residential subdivisions, close to expressways and larger arterial roads.

The foreclosure crisis changed this dynamic. Because foreclosures primarily affected the single-family stock in the region, because so many properties flowed to investors after foreclosure, and because of extremely tight mortgage markets that followed the crisis, many single-family homes were converted to rentals. Similar patterns occurred in many Sunbelt metros, but Atlanta was among the leading sites of this restructuring.

In 2012, this trend was effectively “juiced” by a combination of public policy and Wall Street financialization that drove a great deal of globalized capital into this new, burgeoning SFR market. Several large, institutional private-equity firms entered the SFR market, and the Atlanta region was a key early target. The region promised continued population growth, lots of foreclosures, and little regulation of landlord-tenant issues or the prospects of something like rent control. These firms began sending multiple representatives to the foreclosure auctions that occurred each month in the front of county courthouses. They also began buying foreclosed properties off the books of banks and subprime lenders. And because by this time, foreclosures had spread much more into the prime market, some also sought to purchase foreclosed properties or distressed loans from Fannie Mae and Freddie Mac.

Beginning in 2007, millions of families were rapidly pushed into the rental market and then precluded from reentering homeownership for years due to their damaged credit histories. On top of this, mortgage markets tightened drastically, and many would-be homebuyers were burdened with student debt. Finally, capital flooded into the SFR industry, allowing investors the ability to scoop up millions of homes, often paying cash, making it more difficult for owner-occupiers to compete in the market, especially in the lower- and middle-cost tiers. From 2006 to 2015, the number of SFRs in the fifty largest U.S. metros increased by approximately two million, from 3.8 million to 5.8 million. The share of single-family homes that were rentals increased in all fifty of these metros, with the aggregate share increasing from 11.3 percent to 16 percent, a forty-two percent increase in SFR share. Moreover, the nine metropolitan areas with the greatest increases in SFR share were all located in the Sunbelt. The Atlanta metro had the fourth-greatest increase in SFRs, increasing from 11.5 percent to 19.2 percent of the single-family stock, a sixty-seven percent increase in SFR share. Other metros with large increases in SFRs included Las Vegas, Phoenix, and Tampa, all metros that had experienced large numbers of foreclosures.⁴⁷

The growth in SFRs occurred in many parts of the Atlanta region. Most neighborhoods experienced at least a three percentage-point increase in single-family rentership over the 2010 to 2015 period, and many experienced increases of over fifteen percentage points.⁴⁸ Surges in SFRs were greater in more diverse suburban neighborhoods, those with larger Black, Asian, and Latinx populations. Many neighborhoods that had experienced higher levels of foreclosures during the crisis experienced larger increases in SFRs, because many new SFRs had been foreclosed homes. There was one notable exception here, however. Foreclosures in neighborhoods with high property values did not result in increased SFRs. SFR investors were not looking to pay the higher home prices commanded in these areas, and wealthier homeowners had strong access to mortgage credit despite the tighter mortgage markets that disproportionately affected lower-wealth households.

In 2016, Amherst Capital Management reported that the Atlanta metropolitan area was the largest for institutional SFR investors, followed by Phoenix, Miami, Tampa, Dallas, Charlotte, and Houston, all Sunbelt cities. It accounted for over fifteen percent of all institutional SFR homes, totaling over 30,000 SFRs in the region.⁴⁹ Moreover, the Atlanta metro was the largest SFR market for the largest institutional investor, Invitation Homes, accounting for at least 7,500 of its 48,000 homes by 2016.⁵⁰ As the CEO of Colony Starwood, a major SFR investor, proclaimed, Atlanta was one of private equity’s “strike zones.”⁵¹

Suzanne Lanyi Charles examined the ownership patterns of four of the largest institutional SFR investors and how their properties were distributed throughout the Atlanta region as of 2018.⁵² These included Invitation Homes, American Homes 4 Rent, Front Yard Residential, and Tricon American Homes. Charles’ analysis confirmed that Gwinnett County was ground zero for institutional SFR investors, with the four firms owning just over 6,200 SFRs in Gwinnett, almost twice the number of the next highest county, Cobb, at just over 3,200. Gwinnett has approximately the same number of SFR homes as Fulton County, but Fulton only accounted for just under 2,000 of the SFRs owned by these four firms in 2018. Charles also identified the proportion of single-family homes owned by the four large investors in each census tract and found that their combined market share reached as high as eight percent in some neighborhoods. It is important to point out that this is the share of all single-family homes, including owner-occupied ones. Because most single-family homes remain owner-occupied, the four-firm market share of just SFRs certainly runs substantially higher than this in many neighborhoods. This suggests that these firms likely have significant market power in some neighborhoods and therefore have some ability to extract higher rents or provide lower quality housing.

Charles showed that the four firms’ SFRs were spread across a broad donut that encircles the city of Atlanta, including running through much of Gwinnett, south DeKalb, south Fulton, Henry County, Clayton County, Douglas, Cobb, and Paulding counties.⁵³ However, the firms were conspicuously quite thin on the ground both in affluent, high-cost North Fulton and in the city of Atlanta. They were also less present in the farther-flung, more exurban counties of the region. The four firms tend to focus on different parts of the more established suburban areas. Invitation Homes, for example, tends to be heavily invested in Gwinnett County, south Cobb, Paulding, and Douglas counties, while Front Yard Residential focused much more on the predominantly Black areas of south Fulton, Clayton, and south DeKalb counties. This suggests that, by targeting different parts of the region, the firms reduced competition and maximized their market power.

The story of how private equity entered the SFR business in a big way is, like many developments in housing finance, one that involves both private- and public-sector actors, including relationships and policies that accelerated the flow of Wall Street dollars into neighborhoods hit hard by the foreclosure crisis. For starters, the surging rentership and depressed home values that caught the eye of large investment firms, and eventually led to them investing on the order of $60 billion into SFRs, was the result of policymakers failing to regulate the subprime mortgage market and, after the crisis began, to markedly reduce the number of homeowners losing their homes to foreclosure. But policymakers also played a continuing role in supporting this rapid transition by not acting more forcefully to provide a broader spectrum of households with access to mortgage credit after the crisis and by actively courting Wall Street’s entrance into large-scale SFR ownership.

In August 2011, the Federal Housing Finance Agency (FHFA) issued a public “request for information” to gather views from industry actors on how Fannie Mae and Freddie Mac could more quickly sell off their large and growing portfolio of foreclosed properties.54 The response was, to say the least, enthusiastic, with the agency receiving more than 4,000 comments. Several federal agencies met during the year to discuss possible ways to support more “REO-to-rental” conversions. (REO stands for “real estate owned” and essentially means foreclosed properties on the books of a lender or government agency that has ended up owning such properties.) Then, in January 2012, the Federal Reserve released a high-profile white paper in which it laid out the accumulation of REO properties but also discussed approaches for how policymakers, agencies, and the private sector could facilitate, perhaps even subsidize, the flow of properties into investors’ hands to rent them out. As the paper put it:

. . . the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance. Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions—for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties—or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.⁵⁵

The authors of this paper argued that policymakers had a choice between allowing families to purchase more homes at a time when values were relatively low or spurring a speedier flow of these homes to investors and, in particular, to larger-scale institutional investors backed by Wall Street and private equity dollars. It is clear that federal policymakers, in the aggregate at least, chose more the latter route than the former. As a result, policymakers facilitated the transfer of tens of billions in housing value to larger-scale, deep-pocketed investors during a time of low but soon-to-be rising prices. This was on top of the even larger number of homes captured during this period by more traditional, smaller-scale buy-to-rent investors.

The January 2012 Fed “REO-to-rental” white paper was a pivotal document. It gave Wall Street firms the credibility they needed to gather support from broader capital markets and their institutional clientele. The paper was cited repeatedly in investor prospectuses and private-equity pitches at invitation-only country club lunches.⁵⁶ As Bret Christophers has written, the Fed had performed the “crucial discursive work in making conceivable and creditable large investor portfolios such as Blackstone would subsequently build.”⁵⁷ Within a few weeks, Warren Buffet appeared on CNBC, in a widely cited interview, where the “Oracle of Omaha” proclaimed that he would purchase “a couple hundred thousand” single-family homes if he could.⁵⁸ This was somewhat prescient because it was about the number Wall Street firms had purchased by 2016.

In the meantime, a firm named the Treehouse Group had begun buying foreclosed homes in Phoenix in 2010 and 2011.⁵⁹ It partnered with another firm, Riverside Residential, to gain more capital to scale up its operations. Soon Blackstone, the international private equity firm, took notice of the Treehouse-Riverside venture just when federal policymakers had begun to discuss the continuing build-up of foreclosed homes and the potential for increasing REO-to-rental pipelines. By early 2012, Blackstone had effectively taken over the firm. In April 2012, about three months after the Fed published its REO-to-rental white paper and about seven months after the FHFA had issued its request for information, the new firm, Invitation Homes, purchased its first home. By the end of 2012, Invitation Homes had moved into the Atlanta region. By March 2013, it had purchased thousands of homes in the region, a substantial portion of the 17,000 homes it had already acquired around the country in less than a year.⁶⁰ Other major private-equity firms also pushed early into the region, including Colony Capital, Waypoint Homes, and others.

The Federal Reserve, in its 2012 white paper, had suggested that institutional investors might be given incentives to “provide appropriate property management by deferring some of their compensation” until several years of renting properties in a manner consistent with ‘good landlord’ practices . . .”⁶¹ The compensation of the corporate leadership of firms like Blackstone and Colony Capital doesn’t appear to have been significantly limited during this period. For example, Steven Schwarzman, the CEO of Blackstone, saw his total compensation increase from $223 million in 2011 to $810 million in 2015.⁶² Even if Fannie Mae and Freddie Mac did take some measures to incentivize private equity buyers of bulk-sold homes to practice “good landlording,” it is unclear what portion of the institutional SFR market this would have affected. Many of the homes that ended up in the hands of these firms were acquired through individual purchases of foreclosed properties via county foreclosure auctions or mortgage servicers and not from Fannie Mae and Freddie Mac.

A variety of investigative journalism, advocacy research, and scholarly literature suggests that there have been some significant problems in how the new Wall Street landlords have treated their tenants. In 2014, the activist groups Occupy Our Homes Atlanta and The Right to the City Alliance issued a report on Invitation Homes.⁶³ They interviewed a sample of twenty-five tenants in Invitation Homes properties. Eighteen of these respondents reported that they had experienced maintenance problems with their homes. Over two-thirds indicated that they had had no contact with any individual at the landlord. Alana Semuels, a reporter with The Atlantic, spoke to two dozen tenants and reviewed twenty-one lawsuits against SFR firms in Gwinnett County, one of the prime submarkets in the region for institutional SFR investors.⁶⁴ The tenants reported numerous instances of poor maintenance and problems with their homes.

Elora Raymond and her colleagues examined the eviction behavior of large institutional SFR investors in Fulton County, comparing their eviction activity to that of smaller firms and “mom and pop” investors, which they defined as owning fewer than fifteen properties in the county.⁶⁵ They found that, in 2015, nine institutional investors, as a group, had a twenty percent eviction filing rate, more than three times the six percent rate of “mom and pop” landlords. Even after controlling for a wide variety of property characteristics and the neighborhood in which the property is located, they found that, of the nine institutional investors, all had a filing rate that was higher than other owners and, for seven out of the nine, the difference was statistically significant. The differences tended to be quite large. Colony Capital, for example, was 205 percent more likely to file an eviction in 2015 than a “mom and pop” landlord on an otherwise similar property. American Homes 4 Rent was 181 percent more likely. The increased likelihood of eviction for the nine institutional landlords compared to a mom-and-pop landlord averaged 100 percent higher.

Complaints about institutional SFR homes have not been limited to Atlanta. A 2018 Washington Post investigation into First Key Homes, an SFR company owned by the private equity firm Cerberus Capital Management, found that the firm was a leading code-enforcement violator in Memphis and filed evictions at high rates.⁶⁶ Its eviction filing rate was consistently higher than the eviction rates of the remaining rental properties in the zip codes in which it operated. In 2021, the Tampa Bay Times investigated a private equity firm with ties to the Hermes leather goods dynasty in France, which owned more than a thousand homes in Florida through Lafayette Real Estate.⁶⁷ Lafayette began investing in SFRs after the crisis. Lafayette’s homes required tenants to be responsible for all maintenance costing $100 or less, regardless of whether the tenant was to blame for the problem. Renters were also responsible for maintaining appliances, gutters, and other parts of the home, and were required to carry liability insurance to cover damage to the property of up to $100,000.

Some of the problems reported with SFR investors are likely driven by their business models, including their focus on cutting operating costs. In 2016, the chief operating officer of American Homes 4 Rent, a major SFR investor, stated that it had reduced its spending on maintenance, repair, and “turn” costs from $2,500 to $1,600 per home.⁶⁸ Colony Starwood reported that it had cut its property management costs by twenty-five percent in 2016, including employing video and chat software to show tenants how to repair things like garbage disposals or clogged toilets. Some leases of the large firms required tenants to be responsible for landscaping, insect control, and even repairing sinks and sewer backups. Invitation Homes reported to the U.S. Securities and Exchange Commission in 2016 that it was spending only an average of $1,142 per home annually on repairs, maintenance, and turnover costs (costs entailed in preparing a property to lease a vacated unit to a new tenant). This is well under the average $3,100 per year that homeowners of similarly aged properties pay for repairs and maintenance.⁶⁹

One way to increase a landlord’s net operating income is to cut back on maintenance or service. Another way is to create new sources of revenue via new fees and charges. American Homes 4 Rent reported that tenant charge-backs, the monies charged to tenants after they vacate a property, soared by over 1,000 percent from 2014 to 2018, even though the number of homes the firm owned had only increased by seventy percent.⁷⁰ In 2016, the CEO of Colony-Starwood lamented the “revenue leakage” allowed by “not getting every charge that you are legitimately due under leases.”⁷¹ By shifting maintenance costs onto tenants, reducing their service costs, and charging tenants as much as possible for as many things as possible, the SFR firms could report higher net operating incomes to their investors each quarter, with higher earnings stoking the firms’ values.

 

 

Notes

47.  All of the numbers in this paragraph are from, Dan Immergluck, “Renting the Dream: The Rise of Single-Family Rentership,” Housing Policy Debate 28, no. 5 (2018): 814–829.
48. Ibid.
49. Sandeep Bordia, “U.S. Single Family Rental—An Emerging Institutional Asset Class,” Urban Institute Data Talk Presentation, Washington, DC: Urban Institute, September, 26, 2017, https://www.urban.org/sites/default/files/2017/09/26/final_presentations_-_single-family_rentals_2.pdf.
50. Joshua Beroukhim, “The Story and Lessons Behind Invitation Homes,” Behind the Deals, March 15, 2017, https://behindthedeals.com/2017/03/15/the-story-and-lessons-behind-invitation-homes-blackstones-acquisition-of-50000-single-family-homes-for-10-billion-between-2012-and-2016.
51. Quoted in Francesca, Mara, “A $60 Billion Housing Grab by Wall Street,” The New York Times Magazine, March 4, 2020, https://www.nytimes.com/2020/03/04/magazine/wall-street-landlords.html.
52. Suzanne Lanyi Charles, “The Financialization of Single-Family Rental Housing: An Examination of Real Estate Investment Trusts’ Ownership of Single-Family Houses in the Atlanta Metropolitan Area,” Journal of Urban Affairs 42, no. 8 (2020): 1321–1341.
53. Ibid.
54. Board of Governors of the Federal Reserve System, “The U.S. Housing Market: Current Conditions and Policy Considerations,” Washington, DC: Board of Governors of the Federal Reserve System, January 4, 2012, https://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf.
55. Ibid., 25.
56. I somehow managed to be invited to two of these in the Atlanta area in 2012.
57. Brett Christophers, “The Role of the State in the Transfer of Value from Main Street to Wall Street: US Single‐Family Housing after the Financial Crisis,” Antipode (2021). https://doi.org/10.1111/anti.12760.
58. Alex Crippen, “Warren Buffet on CNBC: I’d Buy Up a Couple Hundred Thousand’ Single Family Homes if I Could,” CNBC, February 27, 2012, https://www.cnbc.com/id/46538421.
59. Kerry Curry, “Invitation to a Housing Revolution,” D Magazine, April 2018, https://www.dmagazine.com/publications/d-ceo/2018/april/invitation-homes-rental-dallas.
60. Arielle Kass, “Big-scale Buyers Drive Housing Sales,” Atlanta Journal-Constitution, March 17, 2013, D.1.
61. Board of Governors of the Federal Reserve System, supra, note 54, p. 13.
62. Aaron Smith and Stephen Gande, “Blackstone CEO Schwarzman’s $223 Million Year,” Money, February 29, 2012, https://money.cnn.com/2012/02/29/news/companies/blackstone_schwarzman. And Reuters, 2016, “Blackstone CEO Took Home $810.6 million in 2015,” Reuters, February 26, https://www.reuters.com/article/us-blackstone-group-schwarzman/blackstone-ceo-took-home-810–6-million-in-2015-idUSKCN0W004N.
63. Rob Call, Denechia Powell, and Sarah Heck, “Blackstone: Atlanta’s Newest Landlord,” Atlanta: Homes for All Atlanta and The Right to the City Alliance, April 2014, https://homesforall.org/wpcontent/uploads/2014/04/BlackstoneReportFinal0407141.pdf
64. Alana Semuels, 2019, “When Wall Street is Your Landlord,” The Atlantic, February 13, https://www.theatlantic.com/technology/archive/2019/02/single-family-landlords-wall-street/582394.
65. Elora Raymond, Richard Duckworth, Ben Miller, Michael Lucas, and Shiraj Pokharel, “From Foreclosure to Eviction: Housing Insecurity in Corporate-Owned Single-Family Rentals,” Cityscape 20, 3 (2018): 159–188.
66. Todd Frankel and Dan Keating, “Eviction Filings and Code Complaints: What Happened When a Private Equity Firm Became One City’s Biggest Homeowner,” Washington Post, December 25, 2018, https://www.washingtonpost.com/business/economy/eviction-filings-and-code-complaints-what-happened-when-a-private-equity-firm-became-one-citys-biggest-homeowner/2018/12/25/995678d4–02f3–11e9-b6a90aa5c2fcc9e4_story.html
67. Emily Mahoney and Ben Wieder, “Multi-millionaire French Heirs to Hermes Fortune Own Stake in Tampa Rental Houses,” February 19, 2021, https://www.tampabay.com/news/real-estate/2021/02/19/multi-millionaire-french-heirs-to-hermes-fortune-own-stake-in-tampa-rental-houses
68. Semuels, supra, note 64.
69. Michelle Conlin, “Spiders, Sewage and a Flurry of Fees—The Other Side of Renting a House from Wall Street,” Reuters, July 27, 2018, https://www.reuters.com/investigates/special-report/usa-housing-invitation
70. Semuels, supra, note 64.
71. Mara, supra, note 51.