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How private equity is gobbling up the American city and turning residents into collateral

by
Valerie Stahl
July 04, 2023

Michael Nagle/Bloomberg via Getty Images

The Hotel del Coronado’s Victorian red turrets peak above the sand dunes off the coast of San Diego. Developed by two industrialists in 1888 at the height of the Gilded Age, the “Hotel Del” serves as an iconic California backdrop, including in the classic 1959 film Some Like It Hot. A recent $400 million renovation added over 15,000 square feet of event space to the already expansive oceanfront campus.

Just 10 miles north, in another oceanside neighborhood called Pacific Beach, sits Bay Pointe Apartments, a 1960s era garden style apartment complex with over 500 units spread across multiple sand-colored buildings.

What do the two complexes have in common? They’re both owned by the New York-based private equity firm Blackstone, as are hundreds of thousands of other properties across the country.

Blackstone Real Estate Income Trust (BREIT) acquired a majority stake in the Hotel Del in 2011 for $600 million. Ten years later, in one of the largest known real estate transactions in San Diego’s history, Blackstone purchased 66 residential complexes across the county for over $1 billion, including Bay Pointe Apartments. Many of the units in these buildings were previously classified as “naturally occurring affordable housing,” meaning that they had significantly below-market rents catering to working families in a city that, like many in America, is facing a stark affordability crisis. Nearly overnight, 5,800 households in America’s “finest city” became tenants of the private equity behemoth.

With this trend only increasing in San Diego—and in cities across the U.S.—it is worth asking: What happens when your home, doctor’s office, or favorite local restaurant gets bought up by private equity?

Already the largest commercial real estate holder in the world, according to the Private Equity Stakeholder Project (PESP), a nonprofit working to bring transparency and accountability to private equity’s various investments, Blackstone is also now the largest residential landlord in the U.S., with an estimated 300,000 rental units across the country. The goal of institutional investors like Blackstone is to optimize profits. On the ground, that translates to maximum allowable rent increases, evictions, the rise of hidden fees, a reduced investment in complex maintenance, and even efforts to influence state and local housing policy. Given the opacity with which Blackstone and other corporate landlords function, it’s hard to say exactly how dramatic the effects are on renters nationwide as compared to general national trends. But zoom in on specific markets or specific private equity firms, and you start to see the increasingly dire impacts.

For example, in Memphis, Tennessee, FirstKey Homes—the single-family home rental company owned by the private equity firm Cerberus Capital Management—was reportedly responsible for twice as many eviction filings than any other rental property manager in the city while also topping the list as the worst building code violator for residential homes by the Memphis Blight Elimination Steering Team in 2018. According to a 2016 report by the Federal Reserve Bank of Atlanta, Atlanta’s largest corporate landlords filed evictions on nearly 1 in 3 of their units, and those households showed a nearly 18% increase in their rate of housing insecurity compared to similar households not renting from corporate landlords. In California, meanwhile, in the past five years alone, Blackstone has spent at least $14 million lobbying against ballot measures that would have limited rent increases across the state. Corporate landlords are increasingly infiltrating the American housing market, from multifamily affordable properties to single-family homes to dormitories to mobile homes, while also contributing to how such spaces are constructed, managed, overseen, and monetized.

The changes in the housing market in San Diego over the last decade reflect this larger story. According to Zillow, the median rent across San Diego County in May 2023 was roughly $3,100, up 92% since May 2013. The increase in the average home sale price across the county was even more drastic, at about $860,000 in May 2023, up 123% compared to 10 years prior.

Long considered a seaside paradise, the city is not getting cheaper to visit either. In 2014, the average room rate per night at the Hotel Del was $272. By the end of 2022, it was up 86%, to just over $500 a night. At Bay Pointe, in 2021, the average rent was $1,829 a month. By May 2023, since Blackstone’s acquisition, rents ranged from $2,400-$5,500 per month, up a striking 200% in just two years.

What happens when your home, doctor’s office, or favorite local restaurant gets bought up by private equity?

Blackstone was founded in 1985 as a traditional private equity firm before expanding into real estate investment in 1991. In the three decades since, Blackstone has become “the world’s largest asset manager.” Private equity firms, also known as advisers or asset managers, gamble with pooled-together money from wealthy individuals and institutional investors—things like retirement funds, money customers pay to insurance companies, and university endowments.

Historically, that money was invested in commercial businesses like grocery store chains or automobile manufacturers in an attempt to make those businesses more productive and maximize profits. But quietly and with little scrutiny or oversight, these firms have been deepening their investments across sectors and increasingly dominating multiple facets of the American economy.

According to the PESP, the private equity industry currently manages $7.5 trillion in assets. That gives private equity a stake in companies that employ some 11.7 million Americans—a number that dwarfs the employee rolls of America’s five largest employers (Walmart, Amazon, Fedex, UPS, Target) combined.

While investing in companies, including startups, remains a major part of the private equity game, since the 1980s firms are increasingly investing in other parts of the economy.

Take, for instance, health care. According to the University of Pennsylvania Leonard Davis Institute of Health Economics (LDI), in 2010, there were 325 private equity deals involving health care facilities in the United States. By 2021, that figure more than tripled, with over 1,000 deals. These investments are valued at about $200 billion. A March 2023 virtual symposium hosted by LDI researchers explored how private equity’s foray into health care is impacting patients at nursing home facilities. “We find a coherent, consistent picture of patients doing worse after the nursing home is bought by private equity,” said Atul Gupta, an assistant professor of health care management at the Wharton School at Penn. “We also see evidence that the nursing home spending goes up for Medicare by about 6-8%.” Gupta’s research demonstrated that patients exiting nursing homes owned by private equity were 10% more likely to die than those in other facilities.

Recent research led by Dr. Anaeze Offodile II, the chief strategy officer at Memorial Sloan Kettering Cancer Center, showed that in 2017, 11% of all patients passed through a hospital with some degree of private equity ownership. This has deleterious effects on both patient care and costs. A 2022 study found that when private equity acquired physician practices, the average charge per insurance claim went up by 20%. In some cases, private equity firms treat hospitals as speculative real estate investments, as seen in the closure of Hahnemann University Hospital in a gentrifying part of central Philadelphia.

Blackstone’s current real estate investment portfolio, meanwhile, reads like a city’s zoning map, including industrial, retail, office, storage, and hospitality, among other categories. From luxury hotels to office parks, Blackstone and other companies like it, including Starwood Capital Group, Greystar Real Estate Partners, and J.P. Morgan Asset Management, are not only getting richer, they’re also changing the shape—and cost—of the American city.

Quietly and with little scrutiny or oversight, private equity firms are increasingly dominating multiple facets of the American economy.

In the past two years, according to the PESP, Blackstone has aggressively expanded its acquisition of both multifamily and single-family properties, adding roughly 200,000 units to its portfolio during a pandemic that further deepened wealth inequality in the U.S. Their recent acquisitions include over 71,000 units of affordable housing and at least a partial stake in nearly 55,000 single-family homes, both purchased in 2021. A 2022 research memo from Americans for Financial Reform, a nonpartisan nonprofit coalition, found that private equity firms are now landlords to at least 1.6 million families across the United States. This figure is likely an underestimate. Private equity ownership, also known as institutional investment in real estate, is notoriously hard to track, especially as deregulation has fostered a lack of transparency in investment and holdings, particularly for non-publicly traded companies.

Currently, 70% of Blackstone’s $69 billion real estate portfolio is clustered in the southern and western United States, which they classify as strong investments due to the Sunbelt’s growing population, employment, and wages. In 2019, Blackstone made $7 billion on the sale of Invitation Homes, its former division of single-family home rentals, doubling an investment it acquired following the 2008 foreclosure crisis in just seven years.

With more than 40% of American renters spending over 30% of their income on housing, these investments in real estate are becoming more and more significant.

At a recent conference in Nashville, Tennessee, a group of researchers gathered for a series of panels focused on developing methods and strategies for tracking institutional investment in housing across the U.S. One of the panelists, Andrew Messamore, a Ph.D. candidate in the Department of Sociology at the University of Texas at Austin, has been working to develop computational approaches to identifying landlords in Austin. “Property ownership remains a terra incognita and there are no complete studies of ownership patterns in any U.S. city.” Messamore said.

Messamore has found that while the share of institutional investors has remained relatively stable in Austin since 2010, private equity stakeholders have been exerting their influence in other ways. “In Austin, I see widespread evidence that landlords of all sizes are formalizing their business practices through organizational complexity and asset obscuring strategies,” he told me. “Property investors of all sizes have a range of techniques for hiding their ownership, ranging from forming an endless number of LLCs to just putting their property in their employee or family member’s name.”

Operationally, as Messamore puts it, “‘mom-and-pop’ landlords increasingly seem to be acting like small amateur investors,” as large landlords are getting both more sophisticated in their strategies and more remote from the tenants who live in their properties.

Messamore’s research in Austin points to a spike between 2010 and 2021 in the average number of holding companies, subsidiaries, and intermediaries that landlords employ, as evidence of how private equity is making the tenant-landlord relationship more opaque. Those additional layers of ownership make it a lot harder to even identify who your landlord is, let alone talk them out of a rent increase or ask for a brief break when you experience a financial setback.

According to Madeline Bankson, the Housing Research Coordinator at the PESP, “even compared to other corporate landlords, which are also bad, private equity is expected to generate really high returns on relatively short time horizons.” The goal for a private equity firm is “to get a 15 to 20% return—that’s about a twice as high as any other asset class that those investors are going to expect,” Bankson told me, and getting that relies on “screwing tenants over.” This happens through a series of cost-cutting strategies. As Bankson details, “they’re automating property management, they are deferring maintenance, including really serious maintenance—people are having major health hazards in their homes. They’re adding all these kinds of fees and fines, so people end up paying hundreds of dollars more than they think they are going to from the sticker price, and they’re evicting people. And raising rents.”

Beginning in 2012, for instance, the real estate investment company of the former first son-in-law, Jared Kushner, began to acquire nearly 9,000 units of housing for predominantly low-income individuals in the Baltimore suburbs. Upon purchase, Kushner’s company pursued hundreds of legal cases against both continuous and prior tenants of the complexes, including individuals who presented evidence that the charges were spurious, and some who moved before the real estate acquisition even occurred. Tenants who lived through the acquisition spoke to the complexes’ increasingly deplorable conditions, including the proliferation of rats, mold, and leaks. All of this eventually led to a $3.25 million legal settlement on behalf of the tenants, and Kushner’s company eventually exited the deal.

Meanwhile, Blackstone has reportedly raised rents 12% across their portfolio during the pandemic, with apparent aspirations of charging up to 20% more across the board. In the single-family rental market, the rent for homes owned by private equity reportedly increased by 8% during the pandemic, which was 48% higher than the increase in the national average. So while real estate investments are enormously profitable for companies like Kushner’s and Blackstone—the latter has something to the tune of $585 billion in its current global real estate portfolio—it’s often less positive for tenants who see costs go up while losing what little accountability they may have had with more traditional landlords.

Some tenants, however, are beginning to fight back. With help from the Alliance of Californians for Community Empowerment (ACCE), San Diego residents have formed the Blackstone Tenants Union. ACCE has been organizing tenants who are now residents of Blackstone-owned properties across San Diego County since December 2021. Their member base has grown to around 80 and counting, with the goal of combating rent increases in Blackstone-owned properties, advocating against no-fault evictions, and encouraging local pension funds to divest from Blackstone-controlled investments.

Gina Ligon, a tenant organizer at the Blackstone Tenants Union, described how her San Diego complex that was once known as Doriana Apartments is now being rebranded as “The View.” Ligon told me that “when people move out, they repaint and put down this wood flooring and hike up the rent.” As a result of the rebranding and Blackstone’s acquisition, she has had a number of neighbors forced into various degrees of housing insecurity. This includes a family with an infant child who was evicted from the complex and are now living out of their car and a family whose primary breadwinner took a job in another city to afford rent—but that is still spending about 75% of their income on housing.

These organizing efforts are not intended to stop at Blackstone. As Sarah Guzman, a San Diego-based community organizer at ACCE told me, the goal is to “eventually not just get Blackstone to stop increasing the rents for tenants, but somehow expand that to other landlords, especially corporate landlords.” Tenants have suggested advocating for regulations that would limit the number of units a corporate landlord could own, and they would like to see naturally occurring affordable housing to be preserved through policy mechanisms such as public acquisition or community land trusts.

On a recent Saturday morning in June, residents streaming in and out of the Bay Pointe Apartments skewed young. One resident who moved to the complex just a few weeks ago was paying $3,000 a month for a one-bedroom apartment. Another told me that the complexes’ “amenities were not great,” and described a situation where they were initially promised a one-bedroom, only to spend their first month in the complex in a studio apartment. “I thought it was going to be better when new management came in, but they didn’t change anything,” one resident told me. Most of the people I encountered were aware of the recent management changes but had no idea that Blackstone was their new landlord, a trend that Guzman told me was ubiquitous among residents across Blackstone properties in San Diego County.

With Blackstone’s increasing buy up of residential real estate, San Diego is now a textbook example of a half-century-long process that is making cities unaffordable for the middle and working class. In the first American great urban restructuring of the 20th century, the federal government propped up private investment in suburban neighborhoods through subsidizing infrastructure and the provision of low-interest 30-year loans, made available almost exclusively to white middle-class families. Blockbusting, redlining, and abandonment proliferated across U.S. cities in the aftermath, leaving predominantly Black and brown residents to organize their neighborhoods for themselves.

However, the flow of money outside of the city left urban areas vulnerable to further extraction. As early as the 1970s, New York, Philadelphia, and other cities began to see waves of gentrification. While some scholars were decrying gentrification as a product of the cultural tastes of what we would call hipsters today, others like the geographer Neil Smith were focused on flows of money and capital investment rather than individuals’ consumption habits. “Gentrification is a back to the city movement all right, but of capital rather than people,” he observed. “The people taking advantage of this returning capital are still, as yet, from the city.” Over 40 years ago, Smith presciently predicted how investment would reshape the American city, anticipating how first-wave gentrification was just the beginning of this new phase of the financialization of the housing stock.

In a September 2021 Morningstar report describing the conditions of presale for Blackstone’s San Diego holdings, Bay Pointe is grouped together with several other similar properties. The properties named in the report had once been owned by Conrad Prebys, a San Diego developer who, upon getting to know the families across his complexes, significantly invested in Boys & Girls Clubs across the county. Not all landlords were as invested in their communities as Prebys and few management companies were saints, but they had been, for the most part, present in their own properties. They were accountable to their tenants through a legible logic of encountering them where they lived, ate, breathed, and played. Now communities like Bay Pointe have been transformed into something else entirely. As Morningstar recently put it: “the collateral consists of 32 Class B multifamily properties totaling 4,202 market-rate units in the greater San Diego area.” When homes become collateral—items of value that secure a loan or investment—residents become collateral damage. The assets continue to be acquired. The full extent of the damage is just beginning to be seen.

Valerie Stahl is an Assistant Professor of City Planning at San Diego State University. Her research focuses on public and affordable housing, community engagement, and zoning.

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