Sound Investments?

BY LISA MAY

At the time of this writing, ballots were still being cast in the Presidential election. While there are many policy differences between the competing campaigns, there was surprising agreement on one issue: that institutional investors in real estate are a prime cause of our nation’s housing shortage. What do we mean by that term? And what impact do these investors have on the housing market?

To hear news stories, policymakers, or online commenters tell it, institutional investors are shady, multinational hedge funds buying up all the available housing inventory and leaving our country with a permanent class of renters. Therefore, to protect individual purchasers, legislators should take action to limit institutional investors’ ability to buy and hold residential properties. Simple.

The reality is, of course, more nuanced, and that makes policy solutions far more complicated.

At present, there is no set standard for what level or manner of property ownership qualifies as “institutional.” Simply purchasing properties under an LLC or other corporate structure doesn’t differentiate between small and large investors.

Legislators at the state and federal levels have proposed definitions. Ownership of 25, 50, 100, or 120 properties in a single state, or 1,000 properties nationwide, have all been used as proxies for institutional level investment. Others have placed the number at a total property value exceeding $12 million or owning more than 3% of any county’s parcels. While these limits are unlikely to impact true “mom and pop” investors, they have the potential to sweep up more than just hedge funds.

Further, conversations surrounding this practice tend to conflate the subsection of institutional investors with all investors. Legislation to address institutional investors in Maryland relied upon statistics from a November 2023 Baltimore Sun article as evidence that curbs were needed. However, that article stated that one-third of properties were purchased by investors—not institutional investors—but all types of investors.

It is an important distinction to make. Investors play a vital role in providing rental housing options for those who are not able to buy their own homes. Many times, they are also the only option for returning vacant, blighted, and other damaged properties back to productive use.

So how do we quantify the number of institutional purchases and distinguish them from more traditional forms of real estate investment?

Some agencies and economists are attempting to do just that. A 2022 NAR report on institutional investors found that they are a growing share of real estate purchases, with an average of 13.2% of homes nationwide purchased by these entities. Some states like Texas and Georgia far exceeded that total, as did several metropolitan areas. However, Maryland was at the bottom of the list, with approximately 10% of home purchases coming from large corporations.

Even then, those percentages are just the share of homes being purchased each year. The Government Accountability Office (GAO) report from earlier this year found that institutional investors owned 450,000 of the nation’s 14 million residential properties. In other words, a mere 3% of the total housing inventory. Even if all 450,000 of those units were made available to owner-occupant buyers, it would be just a fraction of the overall housing shortfall we are experiencing. There’s also an open question on whether institutional investors are truly in competition with individual buyers, particularly when it comes to properties in need of serious repair.

That is not to say that fears over institutional ownership of properties aren’t without some merit. Large corporations tend to buy and hold properties longer than other types of investors, limiting housing turnover and generation of local economic activity associated with home sales. There is also evidence that institutional investors charge tenants higher rents and file for eviction more frequently than other investment property owners. Finally, concentrations of these homes exist within regions, cities, and neighborhoods far exceeding the percentages listed here. More than one study has shown that institutional investors actively choose oversaturation in a single market for ease in acquisition, maintenance, and leasing. If economic conditions change or rental demand slows, that will impact the profits these corporations receive. They could seek to rapidly divest their holdings if promised shareholder returns don’t materialize, disrupting housing markets on a micro level.

All of this is to say that the issue of institutional investors is far more complicated than advertised and not an easy fix for housing woes. That won’t stop policymakers from trying, of course, but will require thoughtful and measured proposals if they are to be addressed.

Lisa May is the Director of Advocacy and Public Policy for Maryland REALTORS®.