Here’s a fact you need to understanding if you want to understand the housing affordability crisis gripping much of the U.S. and Canada: Landlords and developers are not the same.
That statement probably seems head-slappingly obvious when stated so plainly. But it’s something that a striking number of commentators and advocates get wrong without always realizing they’re doing it. For example, if I only had a dollar for every time I read something like this (from a story about a proposal for funding a housing trust fund in Kansas City):
KC Tenants also proposes levying taxes on developers to generate funds….Proposed taxes on developers include an anti-speculation tax meant to stop investors from buying and reselling properties. KC Tenants proposes a 15-20% tax on properties transferred to a new owner within two years. Another proposed tax is a linkage fee, a development impact fee on new construction.
There are two taxes described in that paragraph, and only one of them is actually a tax on developers. The linkage fee specifically targets new construction. The transfer tax, on the other hand, targets the resale of existing properties. These are two completely different proposals with very different economic effects, and to lump them together as affecting “developers” is beyond unhelpful.
I think the root issue here is the populist idea that it’s “the real estate industry” (or some similar construction) that is the villain of this story, profiteering off of soaring rents. Seeing Big Real Estate—developers, investors, speculators, flippers, Wall Street REITs, institutional landlords, mortgage lenders—as a unified front makes intuitive sense to people whose political instincts are anti-corporate and/or anti-elite.
I largely share those political instincts. Nonetheless, this kind of conflation prevents us from understanding the housing market in a coherent way. Different players in the market make their money in very different ways, and have different interests and policy preferences as a result.
A Crucial Distinction
What is a developer? The simplest definition is anyone who increases the value of land by altering it and/or building upon it. (To get nitpicky, the developer plans and oversees the project, hiring the skilled contractors they need: a developer is to a building as a producer is to a Hollywood film.)
What is a landlord? The simplest definition is someone who owns property and collects rent from its user.
These are two fundamentally different roles. The same actor can of course play both of them, at different times or simultaneously. But far more often, it’s not the same people, because it’s not the same business model.
A landlord profits by possessing real estate.
A developer profits by creating real estate.
This distinction, as it turns out, makes all the difference.
Land Owners Profit From Scarcity
Landlords, as property owners, benefit financially from any form of scarcity which makes their property more desirable and expensive. It is low vacancy that allows them to raise the rent and be choosier about their tenants. And low vacancy happens when housing production lags housing demand.
Scarcity is in your financial interest if you’re a small-time landlord who owns some duplexes. It’s in your financial interest if you’re a land speculator sitting on a parking lot for decades waiting to sell to a developer. Scarcity is certainly in your financial interest if you’re a big corporate investor like the infamous Blackstone. The REIT’s own SEC filings explicitly identify the “continuing development of apartment buildings and condominiums” as a business risk which could cause it to lose profit.
The benefits of scarcity apply not just to those who rent out their property, but to individual homeowners who treat their home as an investment. Even if they don’t primarily think of it as one, if they ever intend to sell it or borrow against it, they have at least some stake in continuing unaffordability. As I wrote in “Rage Against the Machine,” although homeowners are often posited as virtuous community voices standing in opposition to a “Growth Machine” consisting of big real estate and local politicians, the truth is that homeowners are, in numerical terms, the biggest land speculators in cities. For each hour spent at the office, a homeowner in San Jose, California collects $100 in rising equity.
As Josh Stephens memorably puts it, “Those who buy pork bellies do not make bacon…. To the person who owns pork bellies, the fewer pork bellies there are in the world, the better.”
Developers Profit by Making High-Returning Investments
Something to understand about developers: Mostly, they don’t own the properties they develop until it’s time to start putting a project together.
This is not strictly true. Sometimes a developer will speculate on an area they believe is up-and-coming by acquiring land early and sitting on it, and big ones may spend years “assembling” a whole block full of small lots in order to do a big project.
But developers, as a rule, acquire land with an eye to developing it. They’re rarely sitting on huge real-estate portfolios, for the simple reason that they couldn’t afford to do that and also, well, be developers.
Making buildings is extremely expensive and puts you in a lot of debt, and selling a completed building is generally the least risky way to pay off that debt and walk away with your profit margin, versus getting into the property management business and having to ride years of market swings. Usually it’s necessary to sell off completed projects in order to afford to begin the next project.
When a developer buys land, who is profiting? Any windfall goes to the previous owner, the one who sold to the developer, because they’re going to sell it for the highest price they can get. Again, the key point here is that making money on the passive appreciation of property value, or the rent it brings in, is a totally different game from making money by building stuff.
Huge developer profit margins do happen sometimes, of course, but they happen most often by successfully betting on an up-and-coming market niche—be that a location or a type of product for which demand has been underestimated. It’s a combination of luck, savvy, good timing, and (often) connections.
Not a United Front
Land owners benefit from scarcity and as such may support policies that drive property values higher. Do developers? This is far less clear, and often the answer is, “No.”
There are a tiny fraction of developers who specialize in truly luxury construction, like the infamous Manhattan supertalls providing many a pied-a-terre to Russian oligarchs. There are far more whose niche involves stuff like the many “boxy” 5-over-1 apartment complexes with trendy-sounding two-syllable names that aren’t truly catering to the superrich, but still sport showy amenities and are expensive enough to build that they wouldn’t be viable if not for high rents.
For the rest of the development world, however, being able to build more homes for more people is preferable to being able to build fewer homes for fewer people. For small-scale developers in particular, land costs are often the most prohibitive barrier to entering the market at all.
When it comes to zoning and other land regulation, different categories of developers have opposing interests. So the notion that “developers” are a unified front when it comes to land use policy or regulation is an illusion.
For that matter, so is the idea that “property owners” or “landlords” are a unified front. Landlords often aren’t just landlords: small-time ones might have a stake in their community in other ways than pure profit. Homeowners often have interests other than just the investment value of their home. Questions like “Will my kids be able to live here?” can tug at their heart strings, but so can more self-interested matters like views, quiet, or perceived or real exclusivity. (The latter, of course, can have an ugly side.)
U.S. housing policy, on the whole, is designed to make housing a secure investment, largely to the benefit of those who got in on the ground floor, and to the detriment to anyone seeking to move to or build in an already-expensive place.
I didn’t write this to essentialize any group as having comparatively noble motives or rapacious ones. Rather, it’s helpful to understand the different interests that different groups may have and may or may not choose to act on. Step 1 in understanding an intractable problem is to understand who benefits from the status quo, and how.
Cover image via Unsplash.