Zillow, the nation’s biggest digital real estate company, announced recently that it would shut down Zillow Offers, its iBuying plan. The company attributed this decision to challenging labor market and supply chain conditions during the coronavirus pandemic. The iBuying, or instant buying model, is predicated on buying and selling homes through a digital platform: Buyers use algorithms to price properties and acquire them directly from homeowners looking to make a quick, unencumbered sale. They then refurbish the properties and flip them to a new buyer. Zillow rapidly expanded its iBuying business in 2021, but the pandemic introduced some wrinkles to its ambitions, namely the unexpected shortage of labor to carry out renovation work and delays on materials for those properties. Add in a tight housing supply and a fast-moving real estate market, and Zillow found it couldn’t make money with the new model.
That Zillow — a behemoth when it comes to big data about real estate — could fail with its iBuying arm might look like a sign of the limits of the technology and the enduring role of local knowledge in housing markets. But my research shows the reality is quite different: Players with access to big capital and precision technologies possess a structural advantage that enables them to use Zillow’s $500 million loss to further build up their own portfolios and profits for wealthy global investors.
Wall Street and Silicon Valley have already transformed U.S. housing markets since the 2008 financial crisis, which had its roots in real estate. And a narrow focus on the implications of Zillow’s iBuying missteps obscures that bigger picture. The nexus of finance and technology has brought about two major changes: The millions of foreclosures in the housing collapse created new opportunities for global investment firms to buy homes at scale, becoming corporate landlords controlling tens of thousands of homes. And a wave of digital advances sped up and reduced friction in home-trading operations and property management. The biggest beneficiaries of Silicon Valley innovations have been Wall Street interests, not individual homeowners — and certainly not renters.
Corporate landlords, focused on easy yields from rental homes, have emerged as an increasingly important and unique actor in housing markets around the country, especially in the Sun Belt. Today, corporate landlords are riding a wave of growth fueled by market conditions emerging during the pandemic. Their growth, though, comes at a cost for the rest of us. Corporate landlords are outcompeting would-be owner occupiers with all-cash, no-contingency offers; they’re charging rent increases averaging 20 percent for new move-ins; and they’re more likely to pursue eviction than mom-and-pop landlords, even during the pandemic.
The collapse of Zillow’s iBuying business represents yet another opportunity for these big investors. Private equity firm Pretium Partners agreed to buy 2,000 homes from Zillow just after the company announced it would exit iBuying. Pretium already controls two single-family rental companies with more than 75,000 properties total. The firm’s acquisition of some of Zillow’s inventory expands the Silicon Valley-to-Wall Street property pipeline that keeps homes off the open market, exacerbating the existing shortage of properties for sale and contributing to already-heated bidding wars. With capital flocking to the rental housing industry since the start of the pandemic, investors like Pretium (which is seeking to deploy at least $700 million on rental homes in a joint venture with a Canadian pension fund) are aggressively chasing inventory.
Pretium is part of a group of large-scale investors that were able to exploit the 2008 crisis and the increased demand for rental housing that ensued as nearly 8 million households lost homes to foreclosures from 2007 to 2016. Encouraged by a federal pilot program to gauge investor interest in converting foreclosed homes into rental properties in bulk, firms like Pretium, Blackstone and Altisource set out to become landlords in the single-family rental sector. There was, it turned out, quite a bit of investor interest. New information technologies enabled firms like Invitation Homes (backed by Blackstone until 2019) to monitor markets at scale, rapidly evaluate and submit offers on homes that meet their investment criteria, and efficiently manage large, geographically dispersed portfolios of single-family rental homes by automating core functions like rent collection and property maintenance.
Today, corporate landlords Invitation Homes, Progress Residential (owned by Pretium) and American Homes 4 Rent each control portfolios in excess of 50,000 homes, most of them acquired as distressed real estate in the years after the 2008 crisis. Their presence is geographically concentrated in Sun Belt markets like Atlanta, Phoenix, Tampa and Dallas, overlapping neatly with Zillow’s inventory of homes. Investors were drawn to these metropolitan areas by large concentrations of relatively new homes that were substantially devalued when the last housing bubble burst. As they take on an outsize role in the markets where their footprint is the largest, access to billions in investment capital seeking returns in the hot housing market and troves of data from their in-house operations put corporate landlords in a position to structurally benefit from the downfall of smaller actors — even one sitting on 18,000 homes, like Zillow.
What does it mean for the rest of us when a handful of landlords have so much power? For regular people, the structural advantage enjoyed by corporate landlords amplifies the inequalities endemic to capitalist housing systems. The relationship between landlord and tenant is always defined by an imbalance of power rooted in the landlord’s ownership of the property a tenant rents. When your landlord is an opaque corporation backed by wealthy global investors and armed with the cash and technology to acquire thousands of homes a month, this power imbalance enables predatory business strategies that are difficult for tenants to challenge. And for people hoping to buy homes in the places where corporate landlords are amassing the most properties, a mortgage, a modest down payment and the emotional considerations involved in choosing a family home simply cannot compete with all-cash offers made within hours of the property being listed. Corporate landlords’ “equity-mining” of communities removes opportunities to build intergenerational wealth for would-be homeowners. While existing homeowners may benefit from rising home values, they may also see public services suffer as corporate landlords seek to minimize property tax bills and more community instability due to their aggressive eviction practices.
The growth of corporate landlords is also breeding imitation: Purporting to harness data science, artificial intelligence and proprietary data “click-and-invest” platforms such as Roofstock, Entera, and Arrived Homes offer armchair real estate investors opportunities to buy anything from shares in individual rental homes to entire rental portfolios. Promises of easy yields from passive rental income capitalize on the buzz institutional actors have created around the rental market — and wider social anxieties about their market power — but may be of questionable benefit to ordinary investors.
As iBuyers, corporate landlords and click-and-invest platforms all seek to speed up housing investments, it is vital to reflect on whose interests are served by this acceleration, and whether its consequences are worthwhile for the rest of us. We know what’s in it for Wall Street and Silicon Valley. It’s no secret that the value of the residential real estate sector is substantial ($36 trillion in the United States in 2021). But we already found out what happens when Wall Street’s interests rule the housing market. Should we expect things to work out better for renters, aspiring homeowners and communities now that finance has joined forces with the tech world?