Private equity money is pouring into the Phoenix real estate market, turning first-time homebuyers into renters.
Javier Vidana started out as a real estate agent in 2013, when Arizona’s Salt River Valley seemed wide open. It was the aftermath of a housing market crash that had seen the typical home value in the Phoenix metro area fall more than 50%, and a single parent with good credit could tap loan programs geared toward first-time homeowners and find a pretty decent place to live. For Vidana, the challenge was convincing potential clients that a house was something they wanted to own. “We were on the phone begging people to buy,” he says. “There was no buyer confidence whatsoever.”
The economy crawled forward, and the housing market with it. Vidana made a specialty of tutoring young buyers on real estate basics. Soon he was supplementing his commission income by selling how-to PDFs on his website and collecting ad revenue on his YouTube channel. Then the pandemic sparked a boom that gave him something new to explain.
Americans responded to the work-from-home era by house shopping, and no big city was hotter than Phoenix. The median home was worth about $285,000 at the beginning of the pandemic; it was valued at $435,000 two years later. It wasn’t unheard of for a seller to receive 50 offers or more, or for a prospective buyer to make offers on a dozen different homes before finally closing a deal.
Across Phoenix, frustrated buyers started pointing fingers. Some complained that Californians were distorting the market by carrying remote-work salaries across the state line. Others focused on technology companies, including Zillow Group Inc., that were buying homes and flipping them on a massive scale. But nothing raised locals’ ire as much as the growing crop of landlords taking huge sums of capital from Wall Street and building gigantic portfolios of rental homes.
This last category bugged Vidana, too. Property investors had seemed all right when they were using cash to score discounts on homes that needed a lot of work. But these new landlords were taking homes off the market and renting them back to people who would have otherwise been in a position to buy. He saw families getting outgunned by investment firms that could afford to pay $450,000 for a $400,000 house. Rents on single-family homes were also rising fast—up 19% in the Phoenix metro area during the pandemic, according to Rick Palacios, research director of John Burns Real Estate Consulting LLC. The result was that buyers could lose out on a home and see it resurface at a rent that was hundreds of dollars a month more than what they would have paid to own it with a mortgage. “The way I see it, they’re stealing from first-time homebuyers,” Vidana says. “They’re trying to push this idea that your first step is not to buy a house anymore, your first step is to rent.”
Amid anxiety over inflation and rising home prices, he isn’t the only one who feels that way. Tenant rights advocates have described Wall Street landlords as mass evictors, and conservative pundits such as Fox News’ Tucker Carlson have blasted them for crowding regular homebuyers out of the market, warning that the very fate of the republic is at stake. Democrats have been in agreement with this sentiment. The Biden administration has argued that big investors are making it hard for families to participate in a crucial part of the American dream.
These aren’t merely symbolic concerns. Home equity represents a huge portion of wealth in the U.S., especially for moderate-income families that have few other opportunities to use borrowed money to invest in assets that can rise in value over time. Price appreciation lets owners accrue wealth and then tap their equity when they have a large or unexpected expense. Other rich countries, including Germany and Denmark, have lower rates of homeownership, but they make up for it with robust social safety nets and pension systems. Those resources aren’t nearly as comprehensive in the U.S., so many use housing wealth to pay for college, health-care expenses, and retirement. At an even more basic level, owning lets a family control its own means of production, says Skylar Olsen, principal economist at online mortgage company Tomo. That can mean working out of a home office, renting out a room on Airbnb, or growing vegetables in the backyard. “We’re all our own kings when we own land,” she says.
At first, Vidana wasn’t too worried about the new buyers, because homes were still affordable. In 2019 he’d helped a client sell a house in Surprise, a suburb 30 miles northwest of downtown Phoenix, to a Japanese company. The buyer, a family-owned conglomerate called Yamasa, redid the kitchen and listed the house for rent at a price that seemed unrealistic. But it rented, and Yamasa’s agent started blasting him with emails, offering cash for other homes. Yamasa, which did not respond to requests for comment, has since become a prolific buyer of rental real estate, acquiring hundreds of homes in the Phoenix suburbs and thousands of other properties across the U.S.
According to the company’s website, Yamasa was founded more than a century ago as a timber business, and later expanded into gas stations, bowling alleys, pachinko parlors, and solar farms. Vidana says he didn’t sweat the details of the company’s provenance. “I was just hoping more corporations wouldn’t follow their lead,” he says. But it was, on the face of it, a little bit odd. Why would a Japanese pachinko operation want to own starter homes in the Phoenix suburbs? The answer began with the company Yamasa had teamed up with to operate its rental home business—and would go a long way toward understanding Wall Street’s new bet on housing.
“It’s a capitalist society. What’s really wrong?”
Residential landlords were as worried as anyone else in March 2020, when it seemed as though mass layoffs would cascade into missed rent payments, evictions, and societal unrest. Instead, cooped-up Americans took their stimulus checks and the money they saved during lockdowns and started looking for bigger spaces. Pretty soon, capital followed. By the middle of 2021, speculation accounted for roughly half of all home purchases in Phoenix, says Palacios, the real estate researcher. Most of the activity was driven by small landlords and home flippers, who targeted affordable homes near good schools—the same places Vidana’s clients coveted.
The suburban gold rush also proved irresistible to private equity giants, sovereign wealth funds, life insurers, and everything in between. Pagaya Technologies Ltd., which uses artificial intelligence software to evaluate consumer credit, started helping clients buy homes. Boston Omaha Corp., a holding company that, among other businesses, provides broadband internet to subscribers in Arizona and Utah, hatched a plan to develop rental projects. So did a water company in Denver, Pure Cycle Corp. “Adding single-family rental or something tied to housing in your company name these days is akin to adding ‘dot-com’ back in 1999,” Palacios says.
But managing rental houses is difficult, even in a tight market where landlords can raise rents with impunity. To jump-start their efforts, many of the newcomers invested through established companies. One of the big players—the one Yamasa chose—was Progress Residential. Progress is a rental company run by Pretium Partners LLC, a company in New York run by Don Mullen, known for overseeing the fabulously profitable “big short” bet against the housing market that cemented the reputation of Goldman Sachs Group Inc. as the financial jungle’s apex predator.
Mullen left Goldman, then founded Pretium in 2012, raising money from investors and plowing it into rental houses as well as bets on corporate credit and mortgages. In its early days, the company bought real estate at depressed prices, but as the market recovered, it learned to win deals by moving fast. These days it employs software that scans real estate listings every 15 minutes. When its acquisitions team sees a home it likes, it estimates rent and a repair budget and aims to get a cash offer out within hours of the home going on the market. Pretium also works with homebuilders to develop communities of new rental homes.
Before the pandemic, it was little known outside of Wall Street, and even there it was overshadowed by single-family landlords such as Invitation Homes Inc., which Blackstone Inc. took public in 2017. Then in 2019, Pretium raised $2.5 billion for its single-family rental business, including a chunk of capital from a Connecticut firm called Landmark Partners, priming Mullen’s company for a buying spree in which it dominated the hottest corner of the hottest housing market in U.S. history. It won high-profile deals to buy homes from Zillow and Front Yard Residential, adding 35,000 homes last year. That brought its total to a little less than 75,000. It’s the second-largest single-family landlord after Invitation.
These developments earned it the envy of competitors and the ire of real estate agents such as Vidana, along with that of tenant advocates and elected officials. The notion of financial-services firms that had gorged on mortgages in the runup to the foreclosure crisis using that calamity as a jumping-off point for a new business had long struck critics as unconscionable. In 2019, Senator Elizabeth Warren, the Massachusetts Democrat, accused the Wall Street landlords of shamelessly “profiting off the destruction they caused.” Housing activists contended the companies were following the private equity playbook of heaping on fees and cutting maintenance costs to boost their bottom line. “I look at Pretium and its peers as industrialized housing,” says Sofia Lopez, deputy campaign director at the Action Center on Race & the Economy, an advocacy group. “It seems inconvenient to them that people have to live in their houses.”
But there was also another way to look at it. Forty years ago, when baby boomers were starting families, Wall Street invented a new field of financial engineering to turn giant pools of capital into loans for consumers. This time around, it was the boomers’ kids who were settling down, but a shortage of housing combined with stagnant wages and more stringent lending standards was pushing ownership out of reach for young families. So Wall Street built a new machine, one that collected rental income and packaged it into a different kind of revenue stream for institutional investors.
In this version of the story, there aren’t enough rentals for families who want to live in a good neighborhood but can’t afford a down payment. Moreover, not everyone wants to be a homeowner, which means unclogging drains and, from time to time, dealing with vermin, all while exposing yourself to the risks of the real estate market. “For those of us who live in big coastal metros where prices go up all the time, that’s fine,” says Jenny Schuetz, a fellow at the Brookings Institution. “But in many parts of the country, people would be better off renting and putting money in an index fund.” Schuetz, the author of the forthcoming book Fixer-Upper: How to Repair America’s Broken Housing Systems, notes that gains in wealth from homeownership also haven’t accrued equally across racial and ethnic groups. Redlining rules the federal government implemented in the 1930s shut Black families out of housing wealth generated in the post-World War II boom. Even today, Black buyers tend to buy later in the housing market cycle, in part because they’re less likely to be able to tap family wealth for a down payment.
Dana Hamilton, Pretium’s head of real estate, says the rise of large single-family landlords isn’t crowding out buyers. She adds that Pretium, which owns a tiny percentage of the country’s rental homes, is offering a valuable alternative to buying. “It used to be that if you wanted to live in a certain neighborhood you had to be able to buy,” she says. “Today, if you want to live in a certain neighborhood, you can buy or you can rent. That access is one of the things people don’t appreciate about what we do.”
Buying and renovating 100 houses a day, as Pretium did last year, is a complicated business, requiring a brawny logistics operation to procure supplies and manage labor. The job was even harder during a pandemic that famously made all kinds of things more difficult to find, including lumber, refrigerators, wall paint, and landscaping materials. In some markets, builders even reported having a hard time finding dirt.
Pretium typically spends $30,000 fixing up a house when it buys it, focusing on items such as laminate floors that help the house wear well and others, like new appliances, that help it rent fast. Pretium typically spends 20 to 25 days renovating a property, an executive said in a podcast interview last year.
Progress, Pretium’s property management arm, is especially good at making homes easy to rent. On a recent tour of available listings in Gilbert, Ariz., where leases ranged from $2,100 to $3,100 a month, stickers on the walls encouraged renters to ask Siri about the landlord. (When asked, Apple’s voice assistant pulled up links to the company’s website that highlighted Progress’s dog-friendly policies and its emphasis on offering homes near good schools.) Another decal had a QR code that allowed prospective tenants to call up a leasing application on their smartphones. When the Progress executive leading the tour couldn’t find a lockbox to get into a house, he called into the office and had a colleague open the door remotely.
There are other upsides to renting from a corporate landlord beyond such technical wizardry. Pretium keeps a fleet of 850 service vehicles for the most common repairs. In a perfect world, a tenant might call about a leaky faucet in the morning and have it fixed by a maintenance worker who already has a replacement drain pipe in the back of his van and gets buzzed into the house remotely while the tenant is at work.
Pretium says 80% of issues get fixed on the first maintenance visit. That still leaves plenty of unhappy customers. There are more than 4,000 members of a Facebook group called Victims of Progress Residential, where tenants complain about rent hikes and unexpected fees and trade tips on navigating the inevitable corporate bureaucracy that comes with being one of 75,000 customers. Mackenzie Cruz, 29, rented a three-bedroom house in a gated community in Mesa from Pretium because it was the first landlord who didn’t turn her away on account of Oakley, the family German shepherd. The experience that followed sounds like what you might get if you rented a house from a cable company (which, if Boston Omaha is successful, you might actually do one day). Cruz says there were erroneous late fees, computer glitches, and countless hours in customer-service hell. Then came the big upcharge: Cruz and her husband asked the landlord to extend their lease by a couple of months so they could wait for the builder to complete the new home they were buying. Pretium said yes but raised the rent from $1,900 a month to $3,100, including fees and other charges.
“The whole time we were there I was working nonstop to avoid giving them more money than I was supposed to,” Cruz says. “It was almost like a third job, after being a full-time worker and a full-time mom.”
Cable company vibes are annoying enough when they affect your ability to stream Selling Sunset, but they’re a lot more stressful when you’re worried about losing your home. Dean Zoller, who rents a home from a corporate landlord that Pretium acquired in January 2021, says he started withholding rent payments after the landlord ignored his request for help fixing a leaky ceiling. He’d had issues with his home before and complained in November 2020, after the Pretium deal was announced but before it closed, and heard nothing for months.
“The thing I worried about is that any minute they’re going to come in and say, ‘Now you have to move out,’ ” he says. “There’s a lot of stress that comes from the lack of communication. It sucks.” A representative for Pretium says the company worked with Cruz to resolve the erroneous charge. The spokesman says that Pretium has no record of Zoller’s complaint and notes that the tenant recently entered into a rent assistance program that provides him with protection from eviction under state law.
But those aren’t the only complaints. At the beginning of the pandemic, an advocacy group called the Private Equity Stakeholder Project (PESP) began publishing research on eviction filings in two dozen counties where court data was easily available online. Mullen’s company, according to the group, filed more eviction cases in those counties during a period when a federal eviction ban was in place. In February, Minnesota Attorney General Keith Ellison filed a suit alleging that Pretium and Zoller’s landlord, HavenBrook Homes, had carried out a plan “to extract ever greater profits from their tenants by severely under-maintaining their homes.”
A representative for Pretium says the company was still reviewing the lawsuit, adding that it’s quadrupled its maintenance team in Minnesota since acquiring HavenBrook at the beginning of 2021. He calls the Private Equity Stakeholder Project “overtly biased” and says it isn’t a “credible source on our nation’s housing.” In July, the firm complained in a letter to Representative James Clyburn, a South Carolina Democrat, that the advocacy group was conflating eviction filings, which didn’t violate the federal ban, with actual evictions, which in many cases would. Pretium, it said, was complying with the law. Jim Baker, the executive director of PESP, sent Clyburn his own letter arguing that Pretium had misinterpreted him and that the threat of eviction can often be enough to make a tenant feel they have to leave.
The Pretium spokesman also says the company provided tenants with more than $30 million of rent assistance and other financial aid and helped its tenants access an additional $50 million through government programs. In February, Pretium announced the hiring of a new corporate affairs executive—Jocelyn Moore, who served as the NFL’s chief communications officer during a period when the pro football league was grappling with racial justice protests and questions about player safety. In her first interview after joining the company, she told Bloomberg Television that by investing in rental homes Pretium was “bringing private capital to bear on one of society’s greatest challenges.”
By then, the company had a new reason to think about its public perception: Tenants were complaining to the pension funds whose capital fuels its single-family rental machine. In Minnesota, organizers for United Renters for Justice, a tenants group, showed up at an August meeting of a state pension fund’s board, demanding that it cancel a planned $100 million investment in Landmark Partners, the company that invested in Pretium. (Landmark declined to comment.) In December the board convened again. Minnesota Governor Tim Walz, a Democrat who presided over the meeting, grimaced on a Zoom call as tenants told their stories. Then the state fund’s chief investment officer advised the board that if it delayed the investment again, it might miss out on the opportunity. Walz said he was convinced Landmark was acting in good faith to address concerns, and the board voted the deal through.
The day before the vote, Javier Vidana contemplated Pretium’s rise over lunch at a Mexican restaurant in Litchfield Park, a west Phoenix suburb. Thirty miles away in Scottsdale, executives from the single-family rental industry gathered at a conference, where some sipped $70 cocktails on a terrace, trying to figure out what to do with what one lender described as an “abundant or even excessive” amount of capital flooding into their space.
Yamasa had slowed its purchases in Phoenix. But Mullen’s company is still a force to be reckoned with locally. In 17 ZIP codes in the Phoenix area, Pretium-connected entities accounted for at least 5% of all home purchases last year, according to an analysis by Redfin Corp. Whether that was too much is hard to say. “Is it wrong? It’s a capitalist society,” Vidana says. “What’s really wrong?”
Vidana grew up in nearby Maryvale, which was developed by a group that included Victor Gruen, the architect who pioneered the enclosed shopping mall. Eight years ago, when he was 21, he and his wife bought their first home using a low-down-payment loan. Their mortgage of $600 a month got them an old house with no central air conditioning. It was a start.
Home values rose, allowing the young couple to trade up to a nicer one two years later. They bought and sold again in 2018, moving to a part of town with a better school district, where the streets are lined with citrus trees. His path might not work for every family, he acknowledged, but it had worked for him. On the other hand, it helped that Vidana, like Pretium, started buying when the market was at its low point. —With Tsuyoshi Inajima