The New Reality of Renting Where You Live

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Remember the old days – actually just a few years ago – when you went to rent an apartment and you usually spoke to a landlord or, in a city, even the super (technically a superintendent) and it was pretty basic. If you rented a single-family house, you often dealt directly with the homeowner herself.

Welcome to the new reality of renting.

Today nearly 25 percent of all the single-family homes in America are owned by investors, sometimes aspiring Airbnb entrepreneurs but more likely giant real estate companies like Blackstone. In fact, The Atlantic reports that last year fully one-third of American house sales “went to people who had no intention of living in them.”

Wired pins it down even more precisely, writing that “nearly one in five homes in the U.S. is now bought by institutional investors, not investors.” Blackstone, probably the biggest of those investors, has increasingly moved into the residential properties side after amassing what is believed to be the largest collection of commercial real estate in the world.

As the percentage of renters slowly but surely increases, the purchasing needs of those consumers will change. And while it’s true that not all of these investor-owned rental properties come furnished, many do, and they represent the shift the home furnishings sector needs to be thinking about when it comes to creating and selling its products.

And it’s not just real estate types getting into the rental space. Adam Neumann, the boy wonder who started WeWork and then cashed out after the short-term office space rental firm’s board fired him, is back with a residential variation of that model with a company called Flow. It just received enough serious private equity money to expand, and Neumann is not the only one working this angle.

All of these moves are creating two big changes in the residential rental market: First, prices are going up even in the overheated housing market. And second – and of more importance to the companies that make and sell home furnishings for homes and apartments – the types of products being bought are very different than if individuals were shopping for their furnishings. Now, furnishings tend to be cheaper, more durable, safer (read less objectionable to most people) and more easily replaced when tenants trash the place. The pandemic didn’t help any of this, but really this has a lot more to do with a new paradigm of old money chasing new business models. And the price of actually buying a home has become increasingly beyond the means of more and more Americans.

Big Investors, Big Investments

The move of big investors into the rental residential space began before Covid, but it certainly accelerated over the past two years. Much of it is just basic supply and demand. For the past decade, ever since the housing crash of 2008-2009 that set off The Great Recession, there have simply been fewer new homes being built. Even at the U.S. population grew and the largest demographic in the country’s history – the millennials – began to enter their prime home-owning stage of their lives the number of new residences being built simply didn’t keep up with the pace.

So, it’s no surprise that big money, like the giant private equity firm Blackstone smelled an opportunity and jumped on it. As of September, 2021, published reports said Blackstone owned 133,000 multi-family units and that count grew when this past February it spent $6 billion to buy Preferred Apartment Communities, a real estate investment trust (REIT) based in Atlanta that owned an additional 12,000 housing units in the Southeast.

And Blackstone is by no means alone when it comes to big investment groups owning tens of thousands of residential units. Invitation Homes, which has been described as “the largest owner of single-family homes in the country” and was at one time owned by Blackstone itself until it divested the last of its holdings in 2019, owns a reported 80,000 single-family homes. It should be noted that perhaps we are near the peak of this trend. In late August Blackstone’s Home Partners of America unit said it will stop buying homes in 38 U.S. cities, saying market conditions had called for a pause. Even at that, however, it said it would continue to buy in 20 other markets and that the areas where it was stopping represented “less than 5 percent of our current activity,” adding, “We hope to resume purchasing homes in these markets in the future.” So, maybe there’s still a lot more of this kind of home buying activity to come.

Go With the Flow

Perhaps the biggest evangelist for shaking up the real estate game over the past decade has been WeWork, the co-working rental office space business started in 2010. For a short time it was one of the largest and considered most successful startups in the tech field. Of course, there was nothing particularly technological about sub-dividing office space and with a burn rate that was estimated by one source at “$200,000 every hour” it’s not at all clear that WeWork was ever a sustainable – much less profitable – business.

The man behind WeWork was charismatic Adam Neumann, who has acquired his own legendary – in fact borderline cult – following even as he was fired and pushed out of the company three years ago…albeit it with an exit package larger than the GDP of many third-world countries. While running WeWork, Neumann began all manner of spin-offs, one of which was WeLive, which attempted to take the office space model and extend it to residences. Attempt is the operative word as this venture collapsed after two projects .
But Neumann apparently didn’t get the residential idea of out his head and he has now started Flow, which has been described as a “branded apartment concept.” Basically, it provides fully furnished residences with extensive amenities and the kind of transitory flexibility that appeals to all those WeWorkers looking for office space. The concept also seems to have appealed to noted Silicon Valley investment firm Andreesen Horowitz which has kicked in $350 million to Flow, valuing the startup at a $1 billion.

And what does $1 billion get these days? Published reports say Flow owns 3,000 – some say 4,000 – apartment units in four cities: Atlanta, Miami, Fort Lauderdale, and Nashville. It is expected to launch next year. Wired magazine wrote that “Flow could become part of a new sector that manages to fundamentally change the way some Americans think about housing, by creating upsides in remaining a renter.” It described the emerging demographic as a “new, permanent rental class.”

Again, Flow is not the only startup working this angle. Bungalow, started in 2016, offers flexible rental terms, allowing renters to move between properties it owns without penalty should they move or relocate because of personal or professional reasons. Sort of a club membership type of model. It’s unclear how many units Bungalow owns. Others in the flex-rent space include Landing, which says it has apartments in 300 cities, and Sentral, which claims to manage 3,000 units and says on its website, “We believe flexibility and freedom are a choice, not a luxury.”

Wired says it expects to see more of these kinds of ventures. “For a certain class of permanent renters, it might create an appealing alternative to buying a house. The larger that group of people grows, the more companies and capital will try to court them.”

The Future of Furnishing

There’s no denying that what’s happening with the domestic housing market represents a fundamental change in the way Americans live. And it’s unlikely to diminish even as the pandemic conditions are increasingly in our rearview mirrors. Good times or bad, it’s going to take a long time for the home building supply to catch up with the demand so companies that sell the products to furnish all of those rental units need to rethink how they do business.

Last year just over 65 percent of Americans owned their own home. That’s been fairly steady for the past decade but is a drop from a high of more than 69 percent in 2004. Given these large-scale conversions of what had been occupant-owned homes into investment rental properties it’s unlikely we’ll get back to the previous proportion anytime soon.

As the percentage of renters slowly but surely increases, the purchasing needs of those consumers will change. And while it’s true that not all of these investor-owned rental properties come furnished, many do, and they represent the shift the home furnishings sector needs to be thinking about when it comes to creating and selling its products.

The Atlantic, in a recent article on the impact of HGTV and other television series on housing trends, wrote, “No matter whether a house’s new owners intend to flip their property or rent it out, maximizing the return on their investment means spending as little money as possible to fix it up in ways that will drive up its eventual price.” The article specifically mentions several products – influenced by the rash of flip-it and home remodeling TV shows – that have gained enormous popularity…and by the way, are less expensive design solutions: laminate flooring versus hardwoods or carpeting, open shelving in kitchens versus cabinetry, barn doors versus traditional framed-out doors and even tile work that comes on sheets rather than individual pieces that need to be installed by professional masons. The article even credits – actually blames — the fast flips and rentals for the wide-spread adaption of the color gray, saying “You can’t escape gray floors,” calling it “as omnipresent online as it is in real life.”

It all comes down to cost and returning the highest amount of money to the owners, especially if they are big investment firms renting out these properties. “In the hands of flippers and landlords,” The Atlantic writes, “these choices are generally made not by people who want to fill the world with the best, safest, most comfortable homes possible but by those looking for a return on their bets. “They’ve chosen these things just as much for what they aren’t as for what they are – inoffensive, inexpensive, innocuous.”

Innocuous is probably not the look home furnishings designers and retailers are going for when they roll out their new products. But with as much as a fifth or even a quarter of all residential properties in the country now in the hands of companies looking at them as long-term investments rather than “forever homes” the industry may need to radically rethink its approach to its products. Blackstone, Adam Neumann and a lot more like them already have.

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