COMMENTARY | Investment giants are inflating Portland housing prices, a local expert argues
Local systems analyst M.K. Hanson is speaking out about massive financial firms speculating in Portland housing. She persuasively makes the case that Portland housing prices are being pushed up – and held up – by Wall Street giants with billions at their disposal and multiple strategies for profiting on their housing investments.
“Large global private equity investors including Blackstone, Goldman Sachs, GlobalLand and others have spent more than $6.3 billion acquiring nearly 29,000 units in the Portland area in just the past four years,” said Hanson. The housing they’re buying is mostly “naturally occurring affordable housing,” for which they pay less than two-thirds per unit what’s being spent in local efforts to expand our stock of affordable housing.
Developers are demolishing sound, habitable, affordable housing and replacing it with housing priced at the very top of the market. The result is to push low- and moderate-income families and communities of color out to the edges of the metro area, away from jobs, schools, public events, parks, mass transit and walkable neighborhoods.
To defend our housing, our neighbors and our city, we need very different legislation and regulation than we have or are actively considering. Hanson’s calling for the creation of affordability, anti-displacement and environmental protections, to halt the loss of affordable housing and to prevent new “residential infill” zoning policies from encouraging more demolitions and price increases.
Hanson is an independent consultant, specializing in re-engineering and integrating convoluted, global manufacturing systems. She’s also co-director of the Coalition to Prioritize, Protect and Preserve Affordable Housing, digging out and synthesizing the data and technical reports that explain Portland’s situation. Hanson’s working to get a hearing for a far more complex and comprehensive explanation of Portland’s skyrocketing rents than the simple stories we generally hear, of housing supply failing to keep up with growing demand.
Portland rents rose 66% from January 2011 to April 2019, according to Rent Jungle. A big part of the story, Hanson says, is that Wall Street investment funds are buying up apartment buildings and houses to replace with luxury-priced units or to “flip,” with a quickie renovation for a fast re-sale or rental.
Hanson’s account is supported by a recent investigation by Seyoung Sung and PSU housing expert Lisa Bates, which found that: “Sales prices for multifamily rental properties have increased substantially, making preservation of affordable rents more challenging. Regionally, the average sale price increased by 78% between 2010 and 2017; during this period there was a 43% increase in the average asking rent. Multifamily housing properties in racially diverse and low-income neighborhoods have been a target for sales activities. Nearly half of the rental units sold were in low-income tracts; and nearly 60% were in racially diverse tracts.”
Institutional investors now own half or more of multi-family housing, largely apartments, in the U.S. and are now buying single-family homes for rentals. It’s hard to compete with big investors, which have access to cheap financing, as well as economies of scale in property acquisition, renovation, marketing and repairs.
In many cities, investment firms now own enough property to wield the monopoly power to jack up rents, and – with deep pockets and tax breaks – can weather high vacancy rates in order to keep rents high. Wall Street is using those rent payments to create highly profitable new financial assets called rent-backed securities, much like the shaky mortgage-backed securities behind the financial crisis of 2008.
What we’re up against is 'the financialization of housing'
The financialization of housing is happening worldwide, driven by Wall Street’s discovery that residential real estate could be the source of tremendous profits. It’s been described by powerful United Nations reporting, led by Leilani Farha, saying, “Housing is at the centre of an historic structural transformation in global investment and the economies of the industrialized world, with profound consequences for those in need of adequate housing … Housing and real estate markets have been transformed by corporate finance, including banks, insurance and pension funds, hedge funds, private equity firms and other kinds of financial intermediaries with massive amounts of capital.”
The U.S. government bailed out the big financiers who caused the 2008 financial crisis responsible for the Great Recession, positioning them to scoop up apartment buildings and foreclosed homes at bargain prices. The U.N. notes:
“Housing and commercial real estate have become the ‘commodity of choice’ for corporate finance and the pace at which financial corporations and funds are taking over housing and real estate in many cities is staggering.”
Blackstone bought 1,400 houses in Atlanta in just one day. Later, journalists described neglected maintenance, high eviction rates and threatening demands when a landlord error resulted in underpayment of the rent. The Federal Reserve Bank of Atlanta found that some of the largest private equity firms were evicting one-quarter to one-third of their tenants a year.
High rents, profitable resale, long-term appreciation and rent-backed securities
Big institutional investors are also hawking a new financial instrument, rent-backed securities. Blackstone pioneered the rent-backed bond, which is a lot like the mortgage-backed “assets” behind the 2008 financial crisis. In 2012, investors paid Blackstone $479 million for the first bonds, effectively a loan to be paid back over time with rent payments. Other investment houses jumped into the game. All of them can use the money they raise to continue real estate buying sprees.
Hanson says that Blackstone sold the bonds asserting that building rents would remain high and vacancy rates low. If rent payments falter, in the coming recession or later, defaults could trigger the collapse of a house of cards of debt, as in 2008. Huge numbers of renters could be evicted in the mess that follows.
What it means for Portland
It means that too many Portlanders are being forced to spend too much on their housing, cutting budgets for other basic necessities. It’s high rents – not high food prices – that make hunger a big problem in Oregon. Low- and middle-income Portlanders are losing their right to the city, by being pushed to the periphery. We face increasing economic and ethnic segregation in a city that has benefited from an unusual level of economic diversity in its neighborhoods.
Hanson fears the new residential infill project will make things worse, noting that Portland’s Planning and Sustainability Commission approved it by the thinnest of majorities, with dissenting members concerned particularly about the displacement of communities of color and low-income residents.
Policy recommendations
We aren’t the only city besieged by big money. Hanson says we can:
• Strengthen demolition restrictions, allowing demolitions of sound, affordable housing only if the replacement meets strict criteria tied to a federal standard of affordability, local affordable housing goals, strong anti-displacement regulations, and environmental protections.
• Pursue anti-speculative regulations such as a Community First Right of Purchase, municipally-funded community land trusts, tenant’s right to remain, historic preservation incentives combining the Low-Income Housing and Historic Tax Credits, lifting the state’s ban on a real estate transfer tax, and enacting both a vacancy and a land-value tax.
• Expropriate units controlled by large investors for conversion to social housing or placement in a Community Land Trust, as in efforts underway in Germany.
Street Smart Economics is a periodic series written for Street Roots by professors emeriti in economics. Mary C. King is a professor emerita of economics, Portland State University.
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