How to Keep the Suburbs Tenant-Free
· The Atlantic
The American suburb has long been the land of the homeowner. For the most part, suburban municipalities permit only one physical form of housing: the detached single-family home, floating on its parcel of lawn and driveway. It’s an image that stands for homeownership, and nearly 85 percent of these structures are owner-occupied. Some communities contain so few accommodations for tenants that they have been defined as “rental deserts.” But there is no technical reason that a renter cannot live in a house. The mortgage is not what makes the walls stand up.
This picture started to change during the 2008 financial crisis, when an unexpected buyer emerged for foreclosed properties: the corporate landlord. Over the course of the 2010s, companies such as Blackstone and American Homes 4 Rent scooped up houses around Atlanta; Charlotte, North Carolina; Tampa, Florida; and Sun Belt cities. In the eyes of many aspiring homeowners, these “Wall Street” landlords were villains who had the upper hand in every bidding war. For people looking to rent, however, the business opened up neighborhoods that had largely been accessible only with a down payment and a mortgage.
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So far, Wall Street landlords have made just a small impact on suburbia. Large investors own less than 1 percent of single-family homes, concentrated in a few places, and even there, their assets are outnumbered by those of mom-and-pop investors. Lately, however, they have coalesced around a model that can deliver single-family rental properties at scale: building new rental homes from scratch. These “build to rent” communities now account for nearly 10 percent of the country’s new single-family homes, double the share from only a few years ago.
But the major housing legislation now being considered by Congress may effectively eliminate both of these approaches, discouraging corporations not just from buying single-family homes to rent but also from building them. Cracking down on the former, which makes the corporate landlord a scapegoat for a complex affordability issue, has the support of most Democrats, the president, the public, and even the home-building industry. Stopping big money from constructing rental homes goes a step further; it reflects a peculiar type of American populism that combines a right-wing fetish for suburbia’s homeowner society with a left-wing distrust of investment capital.
That measure has alienated some of the bill’s previous supporters, including the National Association of Home Builders, which warns that the provision may reduce housing production by 40,000 units a year. The Pew Research Center thinks that the investor rules could kill as many as 100,000 new units a year, meaning that the giant housing-production bill might not produce a net increase in housing at all. One fewer house to rent does not mean one more house to buy. Many of these homes, critics warn, will simply not get built.
Developers of single-family rental homes may yet find ways out of the bill’s restraints. But why is the bill going after new rental housing in the first place? Renting is cheaper and more flexible than buying, and a lot less work. As the subdivision tycoon William Levitt once observed, “No one who owns his own house and lot can be a communist. He has too much to do.” The controversy points to the dual nature of suburbia’s supposed moral benefit. Ownership is thought to confer responsibility, stability, and wealth; single-family design ensures privacy, domesticity, and respectability. Homeownership and design don’t actually have to go together anymore: You can own a condo; you can rent a single-family house. But in attempting to restrict who deserves to live in suburban homes, the bill’s build-to-rent ban pushes for these two concepts to be a package deal.
Build-to-rent emerged in response to recent demographic and economic trends: Aging Millennial households want more space but can’t afford to buy (or don’t want to). It also reflects the evolving business model of the corporate landlords, who, like their tenants, wound up priced out of the resale market. Building-to-rent brings other advantages. The houses can be designed for renters (hardy finishes, wider stairs for frequent moves), and because they are clustered together, they’re easy to maintain.
One of the largest developers of build-to-rent homes is the Phoenix-based NexMetro Communities, which was founded in 2012 and has since constructed more than 60 projects totaling 10,000-plus homes under the Avilla brand. Its Rio Oaks property, in Liberty Hill, Texas, is representative: The 260 houses are smaller than typical for-sale homes (1,200 square feet for a three-bedroom), cheaper than downtown rentals ($2,000 a month), and very far from the city (30 miles north of Austin). The slogan is “Rents like an apartment, lives like a home.”
In many ways, that’s the kind of naturally occurring affordable housing that the 21st Century ROAD to Housing Act is seeking to encourage. The bill began as a centrist assemblage of uncontroversial measures aimed at increasing the housing supply and cutting red tape, including streamlining the inspection of apartments where Section 8 vouchers are used, revising the distribution of HUD grant funding, and changing the financing of modular construction projects.
But now added to that list is a ban on any single investor taking control of more than 350 single-family homes or duplexes total (the definitions of control are complicated). Existing owners are allowed to hold on to their properties. The bill contains a number of “excepted purchase” loopholes, the size of which has been the subject of lively debate over the past few weeks.
What this would mean for builders is unclear, not least because the ultimate enforcement of the bill is left to the Treasury Department. There are also a number of ways around the investor ban. Most obviously, small investors can still buy and build homes for rent. But that would look different than the build-to-rent developments of today. Your Uncle Sid might buy a new house in South Carolina and list it to rent using the mega-homebuilder Lennar’s Investor Marketplace (which has a handy “Add to Cart” button, as if you were buying diapers, not real estate). He is not going to put his 401(k) into building and managing a development of 85 duplexes near Houston’s Grand Parkway.
The loophole that has attracted the most concern is the one that nominally permits large investors to develop build-to-rent houses—so long as they sell them to individuals after seven years. Experts say that the requirement is fundamentally at odds with the long-term interests of the investors who, looking for a steady yield, back these projects in the first place. Even if investors were interested in getting out of a deal, the transaction costs of selling after seven years could decrease the home’s value at completion by 6 percent, according to an analysis by the Urban Institute.
Furthermore, not all build-to-rent properties can be so easily sold piece by piece. Some may consist of many homes on a lot that cannot be subdivided in local zoning, or feature parking lots or community facilities that would have to be transferred to shared ownership or divided up. Josh Hartmann, the CEO of NexMetro, told me that he believes that his company’s developments are exempt for this reason—they may look like small houses, but they are technically (in the eyes of banks and local land-use regulators) multifamily developments because all the units are on a single lot. (The bill does not use this definition of single-family compared with multifamily, leaving much to be sorted out in the regulatory process.)
Another loophole to boost homeownership seems like it could be substantially more inviting: Big investors can own houses so long as they provide services that help tenants build credit with rental payments (many already do) and offer tenants a right of first refusal when they sell. One group sure to take advantage of the relatively simple requirements of this exception are would-be buyers of existing homes. That raises the possibility that limits on investor-builders, combined with this opening for investor-buyers, could shift the market back from new construction to competition with homebuying families—exactly the opposite of what the bill is trying to achieve.
A third possible escape hatch: Build-to-rent developers can use manufactured housing—factory-built homes that would be, through another section of the housing bill, liberated from a long-standing requirement that they sit on a chassis, a kind of steel track beneath the unit. If tens of thousands of new rental homes are suddenly getting built with manufactured components, this exception could amount to industrial policy for the manufactured-home business, fueling a construction technique that seems to never have reached its full potential.
All that said, the loopholes aren’t supposed to let everyone through. Part of the bill’s goal is for investors and the developers who use their money to stop doing what they’re doing—and start building homes for sale again. The build-to-rent industry says that households want to rent, but they concede that one of the reasons is that home ownership is unaffordable. The bill’s supporters believe that investor restrictions can push builders and capital back into constructing homes for sale. “Every home built for rent in Ohio is one less home available for purchase,” Senator Bernie Moreno reasoned in a floor speech earlier this month.
That may be wishful thinking: Much of the reason buyers are having trouble affording houses is that mortgage rates are so high. There are also structural reasons that builders won’t switch between the two products. Chris Nebenzahl of John Burns Research and Consulting told me that he thought it was unlikely that the ban on build-to-rent would result in huge amounts of investor capital moving to for-sale production, because for-sale projects are short-term, not long-term, investments. “It would not shift home-building from for-rent to for-sale,” he said. “You’d see more capital flow back to multifamily but also to other asset classes: industrial, retail, data centers.”
The bill’s bias against renters was a theme of Senator Brian Schatz, one of the Senate’s most YIMBY Democrats, who said earlier this month that the build-to-rent ban was so poorly thought out that it appeared to be a “drafting error.” He criticized “this idea that it is virtuous to try to get people into single-family homes with a mortgage, but somehow there’s something nefarious about providing rental housing to people who are not in possession of a down payment.” Certainly, the build-to-rent developers have opportunistically positioned themselves as advocates for social advancement. Tricon, the build-to-rent arm of Blackstone, even name-checks the Harvard economist Raj Chetty and his famous “moving to opportunity” study, showing the transformative power of one’s ZIP code, in its press releases.
As beneficial as the right zip code can be, however, living in rental housing has true disadvantages. Tenants are exposed to sudden rent hikes, hidden fees, unresponsive landlords, and eviction. They are at a financial disadvantage relative to homeowners, because they do not benefit from the mortgage-interest tax deduction. Some research suggests that corporate landlords achieve market concentration that gives them pricing power, leading to higher rents than in a scenario with more fragmented ownership. The desire to police landlord malfeasance, as much as a protective instinct for homeowners, has been part of the Democratic motivation to crack down on housing investors (including in multifamily developments and trailer parks).
If those are the concerns, says Laurie Goodman, an expert on build-to-rent housing at the Urban Institute, then addressing renter welfare directly would have made more sense: “What you’re actually supposed to do is say, ‘Size comes with its responsibilities, because there’s things you can do as a larger investor that you can’t do as a smaller investor.’” Conditions for big landlords might include up-front disclosure of fees, the right to month-to-month lease terminations, or even limits on annual rent increases for existing tenants.
The final consideration is the geography of build-to-rent: To make low-density development financially feasible, developers tend to use the cheapest land, far outside some of the country’s more affordable cities. The model hasn’t proliferated in the cities that need it most, and it serves to extend sprawling land-use patterns that trade low housing costs for high transportation costs.
Still, a single-family rental 30 miles from town is someone’s idea of home. It may not undermine communism, build equity, promote good citizenship, or qualify its inhabitants for a tax deduction. It may be true, as Herbert Hoover said, that “they never sing songs about a pile of rent receipts.” But a rental home’s advantages are precisely what people usually identify as its problems: It is not the biggest investment you’ll ever make. It is not your problem to maintain or to dispose of. You can move to a better home when you’re ready. If we keep building them, that is.