Economic Development and Real Estate

Private equity changing market

High rental rates, low homeownership driven by outside investors.

October 27, 2017
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After the housing crash, a new industry rose around property management that allowed single-family homes to be treated as commodities. Following the Great Recession, private equity started moving into the housing market, buying tens of thousands of homes and turning them into rental properties.

In a recently aired segment on NPR’s WBUR, Dustin Dwyer, reporter for Michigan Public Radio and a Grand Rapids resident, explained how private investors from out of state became interested in purchasing homes in the Grand Rapids market.

Dwyer was curious, “Why would someone from Chicago or California be interested in buying up homes in Grand Rapids, Michigan?”

Dwyer said he learned through speaking to other residents in the city that out-of-state companies began investing in Grand Rapids homes to turn around and sell them as rental properties, often driving up the price of rent and forcing people out.

He also spoke to analysts and experts in the housing market and learned about the increased trend of investors and hedge funds buying large amounts of properties after the 2008-09 housing crash.

“We profiled one investment company based in Chicago called Residential Dynamics Group,” Dwyer said. “In the past few years, they bought up over 100 homes just in Grand Rapids, Michigan. Their website says they bought over 1,200 homes in the Midwest region.”

Scott Nurski, multifamily investment advisor for NAI Wisinski of West Michigan, said in an interview with the Business Journal that the big investors are coming into Grand Rapids and similarly sized markets mainly because they’re being driven out of their own markets.

“Let’s say you’re in Manhattan, so the largest investment groups go for the lowest risk that they can find,” he explained. “The lowest risk tends to be in the highest populated, highest commerce areas of the country, which are typically the port cities. Those groups will always try to invest there first.”

Nurski added there is a problem in regards to investors from other countries, explaining those investors are making more money now than in the past and want to hold on to that money. In a country like China, for example, investors’ money is less secure because of the nature of the country’s economy, so they may choose to invest in U.S. real estate, and like U.S. investment groups, also may choose to invest in low-risk, highly populated areas.

Local investors then face foreign investors who are willing to pay more and, consequentially, get a lower return on a property they both are competing for, he said. The local investors may be forced out of their home markets and choose to invest in smaller markets where they can offer higher purchase prices and accept lower returns on a given property.

“The guy in New York (for example) is saying, ‘I can’t take a 2 percent return, but my investors will take a 6 percent return.’” Nurski said. “The guy goes to Indianapolis to buy things where he can at least get a 6 percent return. The guy in Indianapolis says, ‘Shoot, I’ve always gotten a 10 percent return and that’s what I always promised my investors. I can’t get them to do a deal for 6 percent.’”

Nurski emphasized what is happening in Grand Rapids is happening everywhere across the country. There is now more capital than there are properties to invest in, which drives up the cost of renting and the cost of housing.

Before the housing crash, Dwyer said, it would have been difficult for big investment companies to handle hundreds or thousands of properties. When property management companies started to appear, they allowed investment companies to treat homes as commodities.

Another change in the wake of the housing crisis is investment companies targeting individual investors as landlords to purchase and manage their properties for them while they receive the generated income.

“It’s possible now for individuals to do this from a distance, and it’s possible for these big institutions to do it with hundreds and hundreds of homes,” Dwyer said.

Nurski confirmed investors in these transactions could be anyone if they have enough capital, whether they are a single wealthy investor or a group of people who put their money into a limited liability corporation (LLC).

“There’s nothing inherently evil about it,” he said. “In fact, there are a lot of ordinary people who are putting their money into these funds that are just trying to create a retirement for their family.”

The trend does, however, mean negative consequences for the cost of both renting and buying homes in these markets. Dwyer cited statistics from Zillow, which stated over the past year, rent had gone up in certain neighborhoods in Grand Rapids by as much as 10 percent year over year while home prices rose 11 percent.

Dwyer also said a contributing factor to rising rents and costs was an increased demand from a denser population in urban areas.

Susan Wachter, co-director of the Institute for Urban Research at the University of Pennsylvania, told WBUR the trend of big investors buying homes as rentals is drastically changing the market.

“We’ve seen an increase in households of approximately 9 million since 2004, and they are all renters,” she said.

Wachter also said the homeownership rate is near an all-time low — 63.7 percent — which is only slightly higher than 62.9 percent in 2016. She also attributed the shift in owning to renting to two major trends in urban areas.

Nationwide, there is an increased trend of people returning to urban areas, where high-paying jobs are typically located. The other trend is the demographic moving to the city — millennials — young professionals who can afford to rent but may not be able to afford to own. Cities are attracting millennials who need to be there for jobs, but consequentially the shift is pushing single-family homeowners into less expensive suburban areas.

Even though affordable housing projects and policies exist in Grand Rapids, Dwyer said it would be a challenge for the city to keep up with the demand because it is a market-driven problem.

“A lot of this wouldn’t be a problem — if rents came up 20 percent a year — if wages came up 20 percent a year,” Dwyer said. “But the wage growth is not keeping up with the rental growth, and that is a problem that needs to be talked about, as well.”

Nurski agreed and offered another solution: cutting costs of production.

“If construction costs were 50 percent lower, the problem would solve itself,” he said. “Ultimately, it’s going to be a matter of, either wages need to rise or costs need to come down; or the city needs to buy the mechanism to help bridge the middle.”

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