Are corporate landlords gobbling up California homes?

By Ben Christopher | CalMatters

Some of the state’s most powerful legislators want Big Landlord out of California’s single family neighborhoods.

The Legislature will consider at least three bills this year to keep so-called institutional investors from gobbling up too many of the state’s widely coveted single-family homes.

Apartment buildings have long been an asset of interest for big investment companies, but the Big Money-owned single family rental is a 21st Century invention. During the Great Recession new companies began cobbling together rental empires out of the nation’s glut of foreclosed single-family homes.

Defenders of the business model applaud the role it played in propping up local housing markets and quickly filling homes that would have otherwise sat vacant and derelict. Critics liken these investors to financial vultures depriving would-be homeowners of a shot at the American Dream while hoarding the profits of the last decade’s run-up in national home prices and rents.

That debate ratcheted up again during the pandemic when millions of white collar renters, suddenly freed from the office, sought out more space further from the country’s urban cores. Today’s high interest rates have slowed that boom, but most analysts predict that the industry is here to stay, absent new restrictions.

California may be the first to enact some.

“Who are we fighting for? Are we fighting for the corporate interests?” San Diego Assemblymember Chris Ward, chair of the Assembly’s housing committee and author of one of the three bills, said on the Assembly floor last month. “Or are we fighting for Californians, for their dream of homeownership?”

For all the debate, open questions about the industry’s size and its effect on the state’s affordability crisis abound. That’s in part because publicly available data about rental properties is scarce — something some state lawmakers have tried, but failed, to remedy in the past.

As lawmakers gear up to take on corporate landlords, here are seven things to know:

1. What would these bills actually do?

• Assembly Bill 2584, written by Assemblymember Alex Lee, a Milpitas Democrat, would ban an institutional investor from buying or investing in additional single family home properties and then renting them out.
• Senate Bill 1212, by Senate Housing Committee Chair Nancy Skinner, a Berkeley Democrat, would go a step further. It would ban institutional investors from “purchasing, acquiring, or leasing” a single-family home or duplex for any reason.
• Assembly Bill 1333, authored by Ward, would ban developers from selling homes in bulk to big investors. This is aimed at increasingly popular “build-to-rent” projects, in which developers build single-family subdivisions with the specific aim of selling them to single-family rental companies. This bill is backed by the state’s association of REALTORs, who have an interest in banning bundled sales that cut their members out of the buying and selling process.

2. What are “institutional investors” anyway?

It depends on whom you ask. Even the three bills described above use different definitions.

Lee’s bill uses the size of a company’s investment portfolio as the cut-off, deeming any “business entity” with at least 1,000 single family homes on its books as “institutional.” That would apply to just four companies who own a total of 17,300 homes, according to estimates compiled by the California Research Bureau, which conducts research at the request of state lawmakers.

Skinner’s proposed ban would apply to a broader category of investor: Any managed fund, including private equity funds, and real estate investment trusts , which are publicly traded companies that invest in real estate.

Ward’s bill uses Lee’s 1,000-property cut off, but also specifically calls out those trusts in his bill language.

3. Do corporate landlords own a lot of homes?

Businesses that own at least 1,000 single family homes own roughly 446,000 properties nationwide, according to an estimate by the Urban Institute, though the report’s authors concede that the “data and definitions are somewhat fuzzy.”

Nearly half a million homes is a big number on its face. It’s more than the total number of homes in San Francisco.

But compared to the housing stock as a whole, it’s less than half a percent. Even looking at just single-family rentals, the vast majority of which are owned by small and medium-sized landlords, the Urban Institute’s “large institutional” share makes up around 3%.

“I think that the investor problem is kind of a boogeyman for the housing market,” said Daryl Fairweather, economist with the real estate listing website RedFin. “People want to blame someone for high home prices, and it’s easy to blame investors just because they’re, like, an opaque group of people…Really, the problem is just the lack of supply of housing.”

The industry’s critics counter that nationwide figures mask clustering in particular regions — and within regions, in particular cities, or even neighborhoods. They also say that the industry is growing.

Earlier this month, Redfin estimated that roughly 13% of all the homes sold in the final quarter of last year were single-family homes bought by investors.

That’s a sizable chunk, but again, the devil is in the definition.

Redfin labeled an investor as any buyer with one of a number of tell-tale corporate signifiers in its name, such as “LLC” or “trust.” That would likely include a lot of mom and pop landlords, who have opted to put their properties into corporate structures to shield themselves from legal liability.

4. What about in California?

Lists of top single-family rental markets vary, but Atlanta, Georgia; Charlotte, North Carolina; and Jacksonville, Florida regularly come out on top. California does not appear to be a destination of choice for the nation’s largest investors. Less than 2% of single-family homes are owned by investors with 10 properties or more, statewide, according to the California Research Bureau.

What institutional investor-friendly markets have in common: Rapidly growing populations and relatively low real estate prices compared to rents.

“That does not describe California at all,” said Laurie Goodman, an economist at the Urban Institute.

When big investors do show up in California it’s disproportionately in the state’s quickly growing, still relatively affordable regions: the Inland Empire, the southern half of the San Joaquin Valley and the Sacramento suburbs. The county with the highest share of single family homes owned by big investors is Fresno at 5.9%, according to the California Research Bureau.

Fresno is a bit of an unusual case, in that the largest single owner there, JD Home Rentals, is a local outfit whose portfolio of some 2,000 homes are clustered in that region.

Statewide, the largest single corporate owner is also the country’s biggest. Invitation Homes kicked off the corporate single-family rental rental trend when it started buying up distressed houses, rehabbing them and putting them on the rental market in 2012. Originally funded by the private equity giant Blackstone, the company has since become its own publicly traded company.  The company owns 84,567 homes, of which 11,862 are in California, according to its most recent filing with the Securities and Exchange Commission.

5. Do corporate landlords cause rents to go up?

There are plenty of anecdotes of big investors sweeping into a neighborhood, only for rent hikes to follow. Do big investors cause rents to rise or do rising rents attract big landlords? When researchers have tried to disentangle those two trends, they’ve produced mixed results.

One national overview found that rising rents in a city reliably preceded an increase in single-family investor activity three months later. But they didn’t find that the reverse was true, implying that investors chase after rising rents, but don’t cause them.

But another study found that single-family areas with higher concentrations of corporate ownership did, in fact, see modestly higher rents than comparable neighborhoods. These companies were able to exploit their relative control over a neighborhood’s housing stock to extract higher than fair-market rent from tenants, the researchers found. But the researchers also found a second explanation behind the rental run-up: By beefing up security across a slew of properties in the same area, they were able to lower crime rates and “enhance neighborhood quality.”

Many larger landlords also use rent-setting algorithms designed to squeeze the highest rent possible from new tenants. Defenders of the industry say those programs simply allow landlords to find an area’s market rent, though renters,  prosecutors and federal regulators have argued that, at least in the apartment rental industry, it has amounted to illegal price-fixing.

6. Do big buyers take homeownership opportunities away from first-time buyers?

Every house that’s bought by a major investor and converted into a rental is one fewer opportunity for a would-be first-time buyer.

That zero-sum trade off is particularly acute in places where few new homes are being built.

A study out of Atlanta found that an influx of institutional investment in a neighborhood predicted a decline in the area’s homeownership rate. A study in the Netherlands found that when cities banned investors from converting homes into rentals, the number of first-time buyers shot up.

Defenders of the industry offer a counterpoint: So what?

In places where home prices are out of reach for the average person, putting more single-family houses on the rental market gives more people the opportunity to enjoy some of the trappings of the American Dream — a yard, a garage, maybe a better school district — even if they can’t afford a down payment.

The fact that major investors specialize in buying up homes in need of repair means they are often “competing for separate types of products” than first-time buyers anyway, said Goodman.

There’s also some evidence to suggest that allowing more rentals in single-family neighborhoods, no matter who the landlord is, makes those neighborhoods more economically and racially diverse. A study of the Dutch corporate landlord ban found a decline in the number of rentals, an overall rise in rents and an influx of older, richer and whiter residents in the neighborhoods in which those restrictions went into effect.

It’s unclear how relevant that all is in California.

“We sell 99% of our homes to individuals,” said Dan Dunmoyer, president of the California Building Industry Association, a trade group representing the state’s home builders.

For most first-time homebuyers in California, “it’s not like you are competing with a big institutional player, other than a rich, single person from the Bay Area.”

7. Are corporate landlords bad landlords?

It depends on what you mean by “bad.”

Large institutional landlords appear more likely to run by-the-book, standardized operations.

There are upsides to the corporate touch: Large corporations are more likely to operate 24/7 property management hotlines and have plumbers and electricians on retainer. Studies have also found that when filling a vacant unit, corporate landlords are more likely to use impersonal tenant screening systems, which are free of explicit (if not necessarily implicit) racial bias.

The downside: Corporate landlords can be ruthlessly efficient, with an emphasis on “ruthless.” One study, for example, found that they are significantly more likely than small landlords to file eviction notices as soon as they are legally allowed to.

And even companies with in-house legal teams might not always follow the law. In January, Invitation Homes paid $3.7 million in fines and restitution for hiking the rent on nearly 2,000 tenants in excess of what state law allows. In 2021, JD Home Rentals settled a class action lawsuit over habitability complaints.

“Relationships are much more formal when it’s Invitation Homes as opposed to the guy next door and there are pros and cons to that,” said Goodman, the Urban Institute economist. As an example, she noted that her adult daughter had a landlord who used to accept pizza as amends for a tardy rent check.

“You can’t send Invitation Homes a pizza,” she said.