More

Episode Summary:

  • August, M. (2020). The financialization of Canadian multi-family rental housing: From trailer to tower. Journal of Urban Affairs, 42(7), 975-997.
    Abstract: After 20 years of disinvestment, new financial vehicles began targeting Canada’s multi-family apartment sector in the 1990s, with the first Real Estate Investment Trust (REIT) declaring “Apartments make money!” on the cover of their 1999 report. This paper details the financialization of multi-family rental, tracing how REITs grew from owning zero to 10% of Canada’s apartments, while “financialized” landlords comprise nine of the ten biggest landlords. I argue that neoliberal restructuring, government policy, and financial innovations created conditions for profitable reinvestment. This reinvestment is transforming the sector, building-by-building, into a global asset class. Meanwhile, in each suite, tenants are exposed to the logics of finance capital, in which “repositioning” strategies generate profits via dispossession. This paper traces the expansion of financialized landlords across a nation and down the urban hierarchy, from gentrified neighborhoods, to mobile home parks, to northern resource towns—finding that penetration is more prominent in jurisdictions with weaker rent controls. I propose a typology of geographic-investment strategies, in which “core,” “value-add,” and “opportunistic” investment strategies are applied in major markets, marginal geographies, and resource-oriented communities. This trend is understood as one with negative impacts on housing justice, affordability, and patterns of social and spatial inequality.
  • “Housing, Equity and Community Series: Making Rental Housing ‘Home’,” Nov. 20 Lewis Center event with Michael Lens, joined by Chancela Al-Mansour, executive director of Housing Rights Center, and Robert Galardi, chief inspector with the LA Housing + Community Investment Department. https://youtu.be/cEBXQzXQ5wg

MARTINE ABSTRACT:
After 20 years of disinvestment, new financial vehicles began targeting Canada’s multi-family apartment sector in the 1990s, with the first Real Estate Investment Trust (REIT) declaring “Apartments make money!” on the cover of their 1999 report. This paper details the financialization of multi-family rental, tracing how REITs grew from owning zero to 10% of Canada’s apartments, while “financialized” landlords comprise nine of the ten biggest landlords. I argue that neoliberal restructuring, government policy, and financial innovations created conditions for profitable reinvestment. This reinvestment is transforming the sector, building-by-building, into a global asset class. Meanwhile, in each suite, tenants are exposed to the logics of finance capital, in which “repositioning” strategies generate profits via dispossession. This paper traces the expansion of financialized landlords across a nation and down the urban hierarchy, from gentrified neighborhoods, to mobile home parks, to northern resource towns—finding that penetration is more prominent in jurisdictions with weaker rent controls. I propose a typology of geographic-investment strategies, in which “core,” “value-add,” and “opportunistic” investment strategies are applied in major markets, marginal geographies, and resource-oriented communities. This trend is understood as one with negative impacts on housing justice, affordability, and patterns of social and spatial inequality.

  • “This paper explores the financialization of rental apartments in Canadian towns and cities … This process involves the acquisition of apartments by financial vehicles that manage them on behalf of investors. These “financialized landlords” (including real estate investment trusts [REITs], private equity funds, asset management companies, and pension funds) have acquired nearly one fifth of Canada’s private multi-family rental stock, with REITs alone growing from owning zero to almost 165,000 suites between 1996 and 2017. I argue that this shift is fundamentally transforming the multi-family sector, and exposing tenants to extractive business practices that engender displacement.”

 

  • “[F]inancialization is a process of transformation in global and national economies, with profound social and spatial impacts. Emerging alongside neoliberal restructuring, it refers to the growing role of finance in the operations of capitalism, such that profits are increasingly made through financial means rather than industrial commodity production.” 
    • This often means squeezing out “inefficiencies” that currently accrue to workers or, in the case of multifamily housing, tenants. Profits are increased not by producing goods and services that benefit people or produce consumer surplus, but by capturing more of that surplus for investors at the expense of workers or tenants.

 

  • “My definition of financialization for this study is narrowly operationalized, and rests on the moment at which ownership of a multi-family building transfers from a non-financial operator to a financial vehicle, such as a REIT, private equity fund, institutional investor, or asset management firm. At this moment of sale, a building becomes a financial asset, ultimately owned by disparate investors. I argue that this has significance at two levels … First, at the level of the building, acquisition by a financial vehicle transforms it into a financial asset, which makes it newly liquid, tradeable, and legible to investors (Gotham, 2009), who can compare its metrics to other investment products and add it to their portfolios … [Second,] at the level of individual suites within a building. When a building becomes an asset, an important struggle begins in each suite, where tenants are freshly exposed to the logics and practices of finance capital, and where financialized landlords attempt to produce investor returns via “accumulation by dispossession,” targeting tenants.”

 

  • “Canada is a country made largely of homeowners (69% of households), a trend supported by housing policy since the postwar period. Nonprofit and social rentals comprise only 6% of housing, built in a short postwar burst. Privately owned, purpose-built rental housing stock—the focus of this study—was largely produced in the 1960s and 1970s, when federal subsidies and tax advantages attracted development (Sewell, 1994) … By the late 1990s, when financialized investment began, private rental housing was a moribund sector. In Toronto, losses of rental housing to demolitions and condo conversions was outpacing new construction (Shapcott, 2002), and supply was stagnating nationwide, despite growing demand. Private multi-family towers in many places offered an important, if undermaintained, de facto source of affordable housing for seniors, immigrant households, lone-parent families, and racially marginalized renters—groups over-represented among low-income renters … Government policy reinvigorated the multi-family sector in part by generating a crisis in rental housing affordability. In the mid-1990s, the federal government canceled involvement in social housing and downloaded responsibility to the provinces—effectively putting an end to new construction and reducing the supply of affordable housing going forward (Suttor, 2016). Federal efforts turned to financializing homeownership, by securitizing and guaranteeing mortgage loans with risk-free returns for finance capital.”
    • This is very similar to the story of the U.S. multifamily housing market over the same time period.

 

  • “Government deregulation of rent controls further intensified crises and primed the multi-family sector for re-investment. In 1997, Ontario passed the landlord-friendly Tenant Protection Act (TPA), which introduced “vacancy decontrol”—allowing rent increases of any amount upon turnover. In strong markets, this incentivized landlords to remove existing tenants and raise rents on the vacated suites.”

 

  • “The first REITs were launched in anticipation of vacancy decontrol and [above-guideline rent increases] in the pending [Tenant Protection Act], and the Assistant Deputy Minister responsible for housing, Dino Chiesa, even left his post in the government to launch ResREIT and capitalize on the opportunities for profit he had helped to legislate.”
    • !!!!!!!!!!

 

  • “Together with government, industry players innovated the REIT “out of the ashes of crisis” as a better-designed, less volatile, closed-end trust. For inspiration, they looked to the U.S., where advantageous tax code changes had popularized REITs in the 1990s. REITs were quickly embraced for providing high yields, stable distributions, and tax advantages. Total assets in Canadian REITs grew from $80 million in 1993 to $4 billion in 1998, to around $75 billion today, 5 while the number publicly-listed REITs grew from two in 1993 to 50 by 2017 … Since the late 1990s, there has been spectacular growth in the portfolios of financialized landlords in Canada. REITs alone rose from owning zero to 164,498 7 suites between 1996 and 2017, accounting for a shift from zero to nearly 10% of the private multi-family stock in the country.”

 

  • “In Canada, financialization of multi-family private rental has not been driven by global capital and foreign firms, but is homegrown—involving the evolution of small, locally based, often family-run firms into sophisticated financialized players.”

 

  • “The absence of rent controls, which are set by provincial legislation, appears to be strongly related to REIT activity. In Manitoba, Quebec, and British Columbia—three of five provinces with rent control (Prince Edward Island and Ontario also have it)—the share of Canada’s REIT-owned suites is lower than would be expected, given each province’s proportional share of the country’s total stock.”

 

  • “Investors have distinct strategies for different types of properties, and I argue that these map on to the geography of multi-family housing in Canada. Financial investors differentiate between core, value-add, and opportunistic strategies. The safest approach preferred by institutional investors is to target core real estate assets, which are stable, well-maintained assets that generate reliable cash flow. In the world of apartments, these would be luxury or recently renovated, fully occupied buildings with higher rents. Secondly, for those seeking higher returns and open to higher risk, a value-add asset is appealing. Value-add properties have room for improvement: they may be under-maintained and in marginal locations. Value-add properties can be improved through “repositioning,” which extracts greater value and generates profits for shareholders. A third category of property attracts an opportunistic strategy, which offers higher risk and reward, for properties that are badly neglected, vacant, poorly located, or in emerging markets.”

Shane Phillips 0:06
Welcome back to the UCLA Housing Voice podcast. I'm Shane Phillips, and I'm joined by my co-host, Dr. Michael lens. And we're here to talk about housing policy and research that we can all use to make our cities more affordable and equitable. If you liked the show and want to support us, please be sure to give the Housing Voice podcast a review. The main place to do that is Apple but there are a few other options out there as well. Last time, I asked folks to give a rating. This time it's a review. I'm doing my best to keep it simple. And in that spirit, let's get to the interview.

Today, we are joined by our first Canadian guest to my knowledge, or at least the first one who definitely lives and works there now. And that is Dr. Martine August. She received her PhD in Planning from the University of Toronto and is now an Assistant Professor at the University of Waterloo in Ontario. Thanks for coming on the show, Martine.

Martine August 1:08
Thanks for inviting me. I'm glad to be here.

Shane Phillips 1:10
And Mike, you want to say hi too.

Michael Lens 1:12
Hello, Dr. August. Welcome to our podcast. Hello, listeners.

Shane Phillips 1:17
And before I start with our questions, I was doing a little research because I don't know nearly enough about Canada generally, and certainly not the University of Waterloo. And I found out that the university is further south than Portland, Oregon. I just want to confirm that because I checked it on the map several times, and I'm still not entirely sure that I believe it. It just doesn't make sense. Is that actually accurate?

Martine August 1:44
I mean, I trust your map reading skills I'm sure you got it.

Shane Phillips 1:47
Okay, okay.

Michael Lens 1:48
She's not a professor of Geography, she's not a Professor of Portland studies. You know,

Shane Phillips 1:54
I know, I know! I have it in my notes, we are not here to talk about geography. But I did want to ask. So with Dr. August here, we're going to actually discuss your recent publication in the Journal of Urban Affairs, which is titled The financialization of Canadian multifamily rental housing from trailer to tower. So let's just start with the obvious questions. What is financialization? And how does that term apply to housing specifically?

Martine August 2:21
Yeah, so financialization refers to this shift in the global economy that's been underway for the past several decades in which finance has been taking an increasingly dominant role in the operations of capitalism. So scholars of financialization explain how instead of making money through production, like if a capitalist wants to accumulate capital through production, they would build a factory and hire a bunch of workers and make stuff. With financialization, we're increasingly seeing accumulation happening through financial channels and investment in financial assets. In paper, I use a definition by Manuel Elbers, which I'll read out because I think it's a good one.

Michael Lens 3:04
Yeah, yeah.

Martine August 3:05
He defines it as the increasing dominance of financial actors, practices, measurements and narratives at various scales, resulting in a structural transformation of economies, firms, including financial institutions, states and households. So I like his definition because it highlights how this growing role for finance leads to structural changes. He calls it structural transformation. And in my work, I've seen how financialization of multifamily housing apartment buildings is transforming life for people in those buildings and transforming that industry. So you asked about how does this term apply to housing. In my research, looking at multifamily housing, I actually define the financialization of multifamily housing quite narrowly. I look basically at the purchase of apartment buildings by financial firms, and then call those firms financialized landlords, so these include things like REITS, Real Estate Investment Trusts, publicly listed real estate companies, institutional investors, asset managers private equity. So I defined it this way because when these types of firms purchase apartments, they turn these apartments into investment products for investors. So suddenly, there's this new access to incomes from apartments for investors, and this changes the way that apartment buildings are managed; it prioritizes the goal of maximizing profits for investors and value for shareholders and as a result it deprioritizes other goals so we might have for housing.

Shane Phillips 4:46
And in what way is that different from you know, just like a mom-and-pop landlord or even, you know, medium-sized but non-financialized landlord, like how do you distinguish... you know, clearly any landlord is in it for investment, and so how is the financialization operating differently? And maybe this can lead us into a discussion of who's benefiting from this and what the harms are from it as well.

Martine August 5:11
Yeah. So the difference is that... that's an interesting question. And I think the difference isn't always extremely clear-cut. And it's certainly the case that any landlord is in it to make money, you know, not a social housing landlord, nonprofit landlord. But there's I think, a qualitative difference, at least, this is what I've been trying to look at, in my research in the way that buildings are being managed, and operated by financial firms. They're bigger, and they have access to vast amounts of capital, unlike smaller firms, and kind of like precursor real estate companies that were around beforehand. And kind of like this last point that I just made is that they're more oriented towards prioritizing investor profits. It's kind of like structurally built into the way these firms operate, right? They have to... you know, if you're a real estate investment trust, you have to increase net asset value and generate distributions for your investors. That's the objective of why you operate. If you don't, if the advisors of the real estate investment trust don't do that, then the firm's going to go under, right, they're going to lose money, they'll lose executive compensation, the value of their shares, or units, as they're called, when it comes to REITs will go down. And so there is this sort of, like, built-in or baked-in compulsion driving them to prioritize these things, say above others. And so it's certainly the case that, you know, the way capitalism operates, you have competition compels firms to adopt similar practices, right? And so you do see the adoption of this similar types of business strategies that financial firms have innovated to extract more value from apartments, you certainly see those strategies being used by financial and non-financial firms alike. So in this sense, so in that way, you might say it doesn't really matter how you classify this firm, if they're up to the same types of strategies, which then, you know, I argue those are bad because they can have negative impacts on people. But I do think that the the trends that we're looking at are being driven by this shift towards financialization, it certainly seems that way.

Shane Phillips 7:29
A couple terms that are kind of popped into my head, while you were saying that were, like this 'fiduciary duty', and like 'shareholder value', is that kind of what this is getting at? Where like, if you're just a mom and pop, you know, yeah, you're trying to make money, but you're not trying to like, necessarily maximize profits in the same way, you know, quarter to quarter in particular, maybe you just kind of have a longer-term view. You know, maybe it's sort of analogous to like, a lifestyle business, as opposed to like a high growth business, if you're familiar with those distinctions, someone who just like owns a popular bakery or something and like, maybe they have interest for franchising it or whatever, but they're just like, "No, like, I'm happy making enough to live off of and like, take a vacation sometimes, and I don't really care about maximizing my profits". And, you know, in the case of housing, that would mean, you know, getting as much revenue basically out of tenants as I possibly can.

Martine August 8:29
Yeah, that's a good analogy. I think that, I mean, Industry watchers would say something similar. I'm trying to understand in my research how people who are in this industry view it. And they certainly point to a shift that's happened with the rise of big institutions, real estate investment trusts, these financial players in the field, are making the argument and I quote, some in my paper who say that there's a difference in the way that they're trying to extract more value than the mom and pops did that. But of course, that doesn't mean that all mom-and-pop operations were equivalent to, I think you said a bakery or something, the lifestyle business for the love of baking rather than for the love of maximizing returns. I think you could get all sorts of diversity there, whether it's a mom-and-pop small, real estate companies, and so on. So one thing I try to avoid doing my research is looking upon those smaller scale landlords if somehow like better or kinder or gentler, or wishing for some return to the past because certainly the case that lots of people and buildings that have been acquired by financialized landlords don't love the landlords far more than maybe it was operating their place. But there are cases where somebody is operating a rental property and is not trying to squeeze every last penny out of it. And one of the things that we see with these financial firms is that they're quite experts at squeezing every last drop of potential. profit that they can from those buildings in new ways. And like I say in the papers is sort of changing the industry.

Michael Lens 10:08
So Martine, you were talking about the differences in profit maximization that is likely to be between different classes of landlords. And, you know, one hypothesis in which, you know, I think you've tested is the extent to which corporate landlords are, you know, as you just said, kind of squeezing the last penny, and, you know, because of various requirements are more likely to, you know, really profit maximize at the exclusion of other needs or ideas. And you know, one thing I wanted to throw out there is like the extent to which we would really want to rest housing policy or housing, desired outcomes, based on kind of a reality, or assumption that we have a group of landlords if we think about the old times, that really aren't good at profit-maximizing that really aren't squeezing every penny, like, how do we think about policy in that sort of space?

Martine August 11:15
It's an interesting question, I think there's a real difference between making profits and being a good landlord. I don't think that extracting maximum value from a building as a sign that you're a good landlord, or creating good properties and creating a good experience for people living in those homes. Really, what you're doing is creating a lot of money for sort of a middleman in operation, right, where you've got tenants, and then you've got all these investors and landlords. And they're trying to extract more value from these properties in order to deliver a greater share of basically like the tenants wealth and income to these investors who have inserted themselves into the process. I don't think they're necessary at all, you know, we never used to have financial lized landlords, we didn't have real estate investment trusts, acquiring rental housing. And what they're in it for is what they can get out of it, not what they're bringing to it. So your question is kind of about policy. And if we're trying to think of a better world or a better housing system, I don't think that my ideal housing system would have a place for these types of firms, they're just not necessary. And I think it's even the case that in some sectors, it's been shown that financial or for profit involvement in types of housing sector leads to worse outcomes for people. This is one of the things that sort of been established in the nursing home and retirement sector, right, that there's much worse outcomes for workers and for elderly people living in those homes, in for-profit firms. And recent research has shown that like private equity firms, ownership leads to even worse outcomes and a greater chance of death. So in this case, those firms that are great at extracting maximum value from properties and the people who live with them, are not doing a good job making those places good places to live, literally. Because death is like one of the outcomes of their acquisition of homes. And so it's a strong case really for, for having housing not be owned by these types of firms, decommodifying housing, having more like housing that's not subject to these pressures of for- profit ownership.

Shane Phillips 13:31
This might be a good place to refer back to some data in the paper. Could you just tell us a little bit about what the scale of these financialized landlords is? You did a lot of, you know, digging into financial reports and a whole bunch of other things, just to see how this has changed. And I think it really does illustrate how big a shift it has been over a pretty short time.

Martine August 13:55
Yeah, so I looked at real estate investment trusts as one type of financialized landlord, as I call them, for a little bit of background REITs are trusts that pool capital together from investors. And then they use that capital to buy portfolios of buildings, real estate of some kind. And then the managers are the advisors of the real estate investment trust, they know the business and they try to manage that portfolio often aggressively in order to drive those profits for their investors. So REITs are one of the types of financial vehicles that bring together investors with apartments, they're not the only kind. In Canada, they were established in our legislation in 1993. The first REITs to invest in multifamily housing were launched in 1997. And so from the year before that from 1996 until today, REITs have gone from owning zero to over 194,000 apartment suites in Canada. So the line is kind of like going up, and you

Shane Phillips 14:57
And what share of the multifamily stock is that?

Martine August 15:00
So that's about 10% of the private 'purpose-built' multifamily stock. And then it's not just REITs so when I first described how I defined financialization, I talked about other types of financial vehicles. If you include those, like asset managers, private equity, and so on, the biggest 25 financial firms in Canada owns about 20% of all, that's including REITs so about 330,000 suites. And that's just the top 25 biggest financial firms. So I think it's a very conservative estimate of the financialization of all ownership.

Shane Phillips 15:37
Yeah

Martine August 15:38
Because there's going to be a lot of smaller firms that when you add it up, would increase the financialized ownership. So the big trend that I see in my paper really is like an increased consolidation, over the last 20-30 years, consolidation of multifamily ownership under bigger and bigger firms earning more and more and an increase in financial firms among those big firms,

Shane Phillips 16:00
You describe a couple or three different investment types, you sort of categorize these different financialized investments, and I think this applies to non-financialized housing as well, but you call them core, value-add, and opportunistic, and I think that's kind of one of the key insights here. Can you just give us a little bit of background on what those different investment types entail, what those things mean, and what happens when those types of investments are made?

Martine August 16:28
Yeah, thank you, I'm glad you like that part of the paper, so I get that kind of language from these firms themselves, who talk about different types of properties and different types of investment strategies that they use in those types of properties. So core refers to properties that are, like full of tenants luxury type of apartment building, making steady rents. A core investment is one in a building like that, which is going to leave you stable returns, but they're going to be, you know, and the risk is low.

Shane Phillips 17:02
Right.

Martine August 17:02
So it's the type of building that, you know, a pension fund, institutional investor would be interested in - just steady money not a lot of risk. And then next up on the kind of like, in terms of risk is a value add property, and a value add strategy; value add buildings would be maybe in like more marginal parts of cities, perhaps they would need a little bit more investment, maybe there was these neglected ones owned by the slumlords that we were talking about. And so it's a bit riskier for those to be acquired, but there's a greater opportunity to make bigger returns. And so this is, I think, where you see a lot of the interest by financial landlords is in the value-add space. And they call it value-add, because there's an opportunity to add value for investors. And the way that this is done is using these techniques that I talked about in the paper, which firms called repositioning a building in the market to be more profitable for investors. And they do that by trying to raise the revenues and decrease the expenses. They do this by trying to change the tenant profile, to get people who are paying higher rents, often there's renovation involved. And then sometimes like major investments in the building to make it run more efficiently, that kind of thing.

Shane Phillips 18:17
I feel like the... your point about this is value-add for the investors, not the tenants.

Martine August 18:25
It took me a minute to realize that when I was reading about it, right, but that's certainly what they're talking about it, and there is money there to be made. And so this is kind of like looking at a real estate building's being like under maintained by the existing owners, because they're not extracting every last penny from it. And if you come in with a value-add strategy, you can submeter the utilities, get the tenants paying their utilities every month, you can start adding fees, to use the laundry. You can add fees for the party room for parking, for whatever types of storage spaces you have in unit, just monetizing every aspect of life in that building. And they're very good at rolling this stuff out and know how to do it in a systematic way. And so that's kind of how you... it's like a recipe that you can add value to these buildings. And then the third kind of category is opportunistic, these would be like, much higher risk and then you know greater return that you get if you take that risk on. It might refer to like a building in an emerging site, or maybe it's like vacant or abandoned. And in my research, I sort of tried to put these three categories and associate them with certain geographies. So I will associate a core investment strategy with like major markets in Canada, we have fewer of them, but it would be like hot parts of downtown Toronto or Vancouver, Montreal. And in the value add, we refer to like more marginal parts of major markets, secondary and tertiary towns and cities and then opportunistic in case, I argue that that's an approach that's used in resource extraction areas in the far north in Canada, where things are a bit more volatile. But there's a chance to make big bucks, if you get in there at the right time.

Shane Phillips 20:12
Yeah, I think we've probably seen that near your hometown. But in like North Dakota, I've definitely read about these kinds of things where, because of all the oil and gas extraction going on there, they've just got, you know, hordes of young-ish men going there and working in no housing. And so they're charging $1800 a month to live in like a trailer, that kind of thing, that's like extremely opportunistic, and if it didn't work out, you'd make nothing at all. But if you got there at the right time, you can make a ton of money off of that kind of thing.

Martine August 20:44
There's one firm here that was, it's now been acquired by other firms, but called Northern Property REIT. And their papers said, there's gold in there, and they talked about this opportunity to follow extraction, mining and this type of thing. And they refer to themselves as like, "these places as well for more profits". By following along after you strike, it's the people that come afterwards and start providing housing, that really are making big money off of those places. But then it does go belly up. So some of the REITs in Canada that have focused exclusively on those resources zones, have had to diversify, because, you know, once it goes belly up, they suddenly can't be making those big runs in those places.

Shane Phillips 21:35
Yeah, but you talked about how, you know, mom and pops, and the smaller landlords are not necessarily good actors, in many cases. They're sometimes run inefficiently, and those benefits can accrue to tenants in various ways. But I think there's been a sort of a discourse online and in housing spaces, really recently, actually, about whether more concentrated ownership might be good. And it's a little bit of, you know, a hot take kind of thinking on this issue. But I do think it's an interesting perspective that just for example, when I see tenant protections, like stronger rent stabilization, or restrictions on conversion of use of multifamily units into condos, or hotels, or that kind of thing, what you very often hear is not, you know, the big REIT is going to make less money, it's the mom and pop landlords who are going to, you know, lose their, their sole investment, their nest egg, whatever. And I feel like they're often used as this more sympathetic shield to prevent stronger tenant protections. And so there's this argument, which I'm sympathetic to, I don't know if I fully believe it. But I could see it, it being the case that if you did have kind of larger, still many, still a large number of landlords, like hundreds of them, thousands of them across the country, but each of them owns, you know, 1000s of units, perhaps it might actually be easier to regulate them, because they're not as sympathetic. And we don't view them as these people who are not just trying to earn money, but like, depend on these properties and the profit maximization. So I'm curious just how you think about that, if you're familiar with that discourse, and how it hits you.

Martine August 23:34
I don't see a strong argument for having concentrated ownership among huge corporate landlords, whether they're, you know, investor backed landlords, financial landlords or not. I mean, I think it would be fine to have a lot of state ownership or decommodified ownership of housing, that would be great. But I mean, the way that big corporate firms and financial firms operate their housing, it's not done in the interests of tenants. And there's a lot of profit-taking that tends to harm tenants is kind of the big argument I'm making.

Shane Phillips 24:08
And just to clarify, I want to be clear that I think that the idea behind that argument is, well, if we just recognize these people as in it for profit, and we don't have to worry ourselves so much about their nest egg and their, you know, sole income, maybe can have the stronger policies, there would be more political support for stronger protections, so that we create these guardrails and we're not relying on inefficiencies of smaller landlords or, you know, whatever else it would take to, I mean, ultimately, I think if we want to have better outcomes for tenants, we just have to have policies in place that require that regardless of who owns the property, and so that's sort of what I'm getting at, and i don't think that takes away way from regulation that limits financialized ownership specifically. And as I said, I'm sort of devil's advocate here. I don't fully believe this. But I think it's an interesting perspective. And I just feel like we... and I know you're not doing this, but we often treat mom and pops as like, inherently better. And I think a lot of the worst stories you hear about abuses of tenants actually come from those smaller ones, even if, in the aggregate, it's maybe not as bad as the REITs are doing.

Martine August 25:35
I think that's a dangerous argument to put forward. Because it's sort of suggesting that we would have to force all advocacy or activism around any type of tenant protections until we get to a point where it might be more politically saleable to people who want to defend small scale landlords. I mean, there's a lot of ifs there, right? Me, I think we need to fight for the tenant protections now. And small landlords be down, I just don't think that there's any reason to be too concerned about protecting somebody's nest egg. If you acquire a property as an investment and plan to make money off of other people's, you know, monthly paychecks, and then you don't, too bad for you. That's what you get when you're an investor. And so, I have zero sympathy for the mom-and-pop landlord. They're making a choice to acquire an income property, they could live in that if they want, or they could sell it if it's not making them the return that they seek. But trying to make an argument that we need to try to concentrate ownership amongst a lot of landlord overlords, and only then will we be able to fight for the protections that we need, which I don't think is gonna happen when you have extremely powerful real estate interests fighting against that type of regulation.

Shane Phillips 26:56
I do think that's one of the biggest arguments against it is like, "well, there may be less sympathetic, but that doesn't mean that they're less powerful".

Michael Lens 27:03
The corporate tax rate in the US probably be a good indicator.

Martine August 27:07
Yeah, they're certainly powerful. And, and they're, I mean, they're quite oriented towards trying to limit tenant protections. And rent control is certainly the case. In my own research, I found that these firms are eager to defend vacancy decontrol, for example, and the deregulation of rent controls that have been here since the late 90s. They love that, that's exactly what's making their business so profitable. And we know that, you know, wealthy actors have the ear of government and have influence in our society. This is like kind of the ethics of what we know from studying urban politics. And the real estate industry is powerful, as planners we know this. And so I certainly wouldn't try to hope for a future where we could bank on the villainization of big landlords as a way to sneak in rent control.

Shane Phillips 28:06
Yeah, I think your earlier point too, about how, you know, we should just pursue this stuff, mom and pops be damned, is well taken. And I really do think there's something unique about real estate investment and landlording in particular, where there's just this expectation that it should only go up in value. Other types of investments, there's this understanding that you're taking a risk, and maybe you win, maybe you lose. But you know, I think we've seen this with the covid 19 pandemic and eviction protections and everything, there's, there's this feeling of like, values should just continuously go up. It should always be profitable. And if ever that changes government needs to step in and and protect landlords against any form of losses, and I think that's a really harmful approach to all of this. Well, since you brought up vacancy decontrol, maybe we can move on to that. So you identified in your paper that rent controls are a sort of deterrent to financialised acquisition with the provinces where rent control exists, or where it's stronger, having a smaller share of financialized units relative to their national share of multifamily overall. And you make a point not to lay all of this at the feet of rent control. There are things like housing and labor demand presence of more or less social housing, language barriers, other things like that also likely playing a role. But can you explain a little bit about why rent control discourages this financialization and share maybe some of the provincial numbers if you have those on hand?

Martine August 29:42
Yeah, right before REITs were first launched in Canada, we had big changes in our most populous province of Ontario, where there was a lot of deregulation of tenant protections. So this vacancy decontrol was launched at the time so we used to have rent control where when a unit turned over when it became empty or vacant, the rent stayed the same level. And then in 97, we got this vacancy decontrol where a unit becomes vacant and landlords can raise rent by any amount. So in the lead up to this, the first real estate investment trusts were launched, citing this impending legislation.

Shane Phillips 30:22
And just to interject because I feel like this is a very interesting and Orwellian, this is the Tenant Protection Act, right? It's is what they called this legislation that allowed for rents to be increased by, you know, whatever amount the landlord pleases. Okay, please continue.

Martine August 30:39
Yes, exactly. And so, and then they're kind of like founding documents, these firms trying to attract investors described how the landscape of tenant protections and rent regulations was about to change. And they say this impending legislation and say, there is a new opportunity ahead of us to make money from apartments which hasn't been there before. And they're talking about vacancy decontrol. And in fact, I cite this in the paper the Deputy Minister responsible for housing in the province of Ontario who helped usher this legislation through this Tenant Protection Act, liens government and forms as the CEO, the second residential REITs in the province

Shane Phillips 31:23
I remember taking notes on that and just putting like eight exclamation marks.

Martine August 31:29
Exactly, so you can see like the clear link here between like state withdrawal, or deregulation, and then this new opportunity created for the private sector and kind of finance coming in and filling this void. And so, vacancy decontrol is important to these firms. We have it in Ontario and other provinces as well. But it allows them to take units and gives this sort of incentive to make units vacant, particularly in places where people have maybe been living there for a long time and are paying a low rent, particularly in local markets where gentrification pressures have created rent gap, such that if you get that person out, you can increase their rent dramatically. And so trying to capitalize on this, capitalize on vacancy decontrol push for those they call them unit turnovers is really like one of the key ways that these firms make their money. And the CEO of starlight investments, the biggest landlord in Canada. He at a recent conference said "the money and returns are made in the units when the units turn over". This is a quote I cite twice in my paper, because to me, it just exposes the way that the profits of these firms are premised on tenant displacement and dispossession. Because the money and returns are made in units when they turn over. So it's really contingent on getting people out. And so for this reason, like to answer your question, this is why rent control is so very important, because it's really at the basis of how these firms make money. They're trying to raise revenues and drop expenses. And when you're raising revenues, the biggest way to do that is from the pockets of tenants, whether it's through just annual increases, we have a guideline increase you're allowed every month, whether it's through above guideline increases, which are allowed here for major capital repairs, that's similar to lots of places or whether it's by pursuing these vacancies that don't allow you to raise rent to the top of the market. And so I suspected in my work that firms might be drawn to areas of the country where there was a weaker tenant protection. And in the paper, I have a map here that looks at the different provinces: 10 provinces in Canada, and three territories in the north. And the provinces that have rent control, have less penetration by real estate investment trusts than you would expect, given their share of the country's apartments. And in the provinces that have weak rent control, like Ontario or no rent control, they have a higher proportion of REITs suites than you would expect, given their proportion of Canada's apartment suites.

Michael Lens 34:10
I wanted to push I guess there's two things that I think from this that, you know, I think that are forms of pushback that you would get from people who are less friendly to rent control or more friendly to, you know, housing as a functioning market, right? And I'll take the first one and then we can get to the second later. The first one is that you know, this idea of displacement as being so profitable rests you know on the fact that this rent control coupled with vacancy decontrol is providing this big gap as you say between what the landlord can get with the incumbent tenant and somebody out in the in the market wants this unit turns over. So, you know, what do you say to the fact that like rent control is artificially creating this profit margin, that itself rests on on this form of displacement?

Martine August 35:14
I mean, I guess, if you believe that rents are artificially low, and that the rents that they raise it to are somehow, like natural or real, or in any way...

Michael Lens 35:25
I mean, but rent control is rent control is intentionally keeping it below.... our listeners can't see my heart....

Shane Phillips 35:36
Rent control is key

Michael Lens 35:37
... rent control is keeping you know that rent below a particular ceiling, right, and so, you know, I'm not saying that the market rent is the natural, you know, beautiful order of things, but it's what the landlord can get.

Martine August 35:50
Yeah, and I mean, what it ends up doing is pushing people out of their homes, and allocating housing based on you know, like, the most that people can pay, whether they're paying what they can afford, or whether they're paying a lot more than they can afford, and sort of being squeezed for that in for that rent every month. But, yeah, I wouldn't align myself with the anti rent control, folks, obviously.

Michael Lens 36:17
Okay. Your response also, to me brings up maybe, because my head is already in this space as like, you know, another big pushback from the housing market proponents, which is that it's not the financialization of housing that's creating some kind of profit, it's that we have a scarce resource, that being housing that is forcing, you know, this hypothetical person that you're saying that is being squeezed for every last penny that they can be squeezed for. It's that scarcity, in the housing market, of this product housing, coupled with this high level of demand by this individual and other people that's making these profits, you know, possible. So some people would say, give these corporate landlords a bunch of competition in the form of a bunch more housing right? And then that's going to kind of dilute the value of the asset. And I think, you know, you provide evidence that, like, these Investment Trusts know that housing is not just going to fall from the trees, this is a scarce resource. So do you think about housing supply housing production as relating to this problem?

Martine August 37:41
Yeah, one. So one of the things that you're referring to that I mentioned, the paper is the way that these firms are knowingly trying to capitalize on the scarcity of affordable housing supply in Canada, which isn't too different, probably from a form of scarcity of affordable housing supply in other places. So we had like the withdrawal of state involvement in federal, and social housing, around the same time that we had this deregulation in the 90s. In Canada, the federal government, like stepped out of providing public housing. And so year after year, you have this decline or an absence of social housing units that would be affordable coming online, that would provide this supply that's really missing of affordable homes that would provide secure tenure, and allow people to live in in all sorts of neighborhoods, and pay affordable rents. So that supply is definitely missing. And it continues to be missing and a lot of the firm's I mean, you could pick up the reports of any firm, and they'll explain to their investors that this market, multifamily housing is strong, because there are barriers to new supply. And there's a limited number of buildings out there. And that's why they're trying to consolidate ownership of them, because they can make a lot of money when they have particularly the you know, like, pseudo monopolistic control and can raise rents as much as they want, and so on. And so it's certainly the case that there's a limited supply of affordable housing. But where I think there gets to be a sort of a disagreement with what I'm writing about, and what I think the arguments that you're referring to, are this notion that if you just build more supply, then the situation will sort itself out. And so this is, you know, a big argument right now in Planning and Urban Studies more generally. But we can see what's not happening. You know, there's lots of vacant homes. There's lots of supply, there's more supply than we need to house all the people that don't have housing, but it's just it's more expensive. It's at the luxury and it's being acquired by speculators. It's being required to launder money is being acquired as some call it like as a safety deposit box for the rich and so it's not supply that is contributing to providing affordable housing for people who need it. And we could continue to build luxury condos in the center or the edge of cities till the cows come home. And we can sit back and wait to see if housing becomes more affordable. I mean, it doesn't seem to be happening.

Shane Phillips 40:21
To be totally candid, I think we'll just disagree at some of that on like the the importance of supply and whether we're building enough housing. I don't think we have to go down that road, because I think the financialization aspect of this is interesting, in its own right, and I think has its own, you know, unique role play. And so to dig into this a little further, I'm curious, we can at least acknowledge that there's not enough housing being built, even if we disagree somewhat on whether it's essential that it all be or mostly be at the lower income level or moderate income level. But putting that aside, like we agree, that the supply matters. But financialization seems to be doing kind of maybe exacerbating some of these changes. Like so taking it as a given that we don't have enough housing, if financialization were not a problem that had grown or if financialization had not increased overall over the past two decades, like how would things look different, I guess, is maybe a better way of putting that question. If the supply problem was still, you know, otherwise the same.

Martine August 41:27
That's a really good question, because these firms aren't contributing to new supply. So what they're just doing is acquiring existing structures, and making them more profitable for investors by raising rents and existing tenants through various strategies. In some cases, upgrading those properties where gentrification pressures allow it, turning them into like a more luxury style, rental, and then increasing rents even more. So really, what financial firms are doing is increasing the prices of rental housing, you know, the rent levels, and, and then decreasing affordability, so contributing to these problems of affordability that we're seeing. So they're one of the forces contributing to affordability problems in our cities. So in that sense, if they weren't around, I don't think this would be happening to the same degree or with the same like precision with the same level of sophistication that these firms.... sophistication and sort of focus on.

Shane Phillips 42:30
It is their business model.

Martine August 42:32
It's their business model. And one of the big firms here called Timber Creek Asset Management, they recently rebranded and call themselves Hazel View, they...

Michael Lens 42:41
I kind of preferred Timber Creek, made me think of forests, you know, hanging out with some big tall trees in the Canadian forest.

Martine August 42:51
Yeah, sounds a little... Hazel view, I'm not sure what that's supposed to mean. But they call their process 'putting a building to a carwash'. So they say they take an under an under managed or undervalued asset...

Michael Lens 43:04
And who doesn't like living at the carwash?

Martine August 43:08
Pretty much anybody in the Timber Creek building, I would say. And they tried to, you know, turn over the tenants., renovate common areas, upgrade the landscaping, invest in certain major capital repairs that will allow them to apply for above guideline increases to the rent. And then they try to then sell that building, which is sort of is stabilized to an institutional investor. And so they call that putting the buildings through a carwash and if you're a tenant living in that building, what you're seeing is rent increases, you're living in a construction site. In some cases, you're experiencing all sorts of like pressures and harassment to push you out of your home, that can be very frustrating and affect people's satisfaction with their building affects their health, physical health, and mental health. And then in some cases, we'll have material impacts too, when they end up having to pay more for their rent. And then sometimes people end up leaving and losing the connection that they had to their community and so on.

Michael Lens 44:11
I guess the extreme opposite of that, of course, is a landlord that lets their units or properties fall into disrepair for long periods of time, right? And so, you don't necessarily want that you're kind of cosmetic carwash, that's part engendered to just extract higher rents, but you also don't want decay, and you know, even unsafe housing and kind of the "slumlord behavior". So like, you do talk a little bit in the paper about how there was in kind of the before times, if you will, there was, you know, pretty low repair levels or upkeep problems were rather persistent. Like, where do you see finding that balance?

Martine August 45:06
Yeah, that's a good question. And it's certainly not good to have landlords neglecting buildings or, you know, not properly repairing them. Before kind of answering that question, though, I just want to point out something really interesting that you see happening all the time in these buildings, which is that financial firms don't necessarily invest in maintenance and repairs. And in fact, they will often ignore maintenance requests from long standing tenants in a bid to try to push them out. So it can lead to this situation where people who've been in this building forever, can't get their stuff fixed even though they're living in a construction site and hearing units all around them get renovated and repaired, and they know that there's, it's only going to get renovated and repaired once they're out for the next person. So there is not necessarily the case that the living environment becomes better for existing tenants. But even if it becomes better for the next person, or if you're concerned about like the asset being maintained, the building being up kept, I kind of think of is using this kind of like false distinction, Tom Slater, and James Philippus and others have pointed to between like gentrification and decline, right, where you often get this argument that, "well, you know, gentrification, we might lose a couple people in the neighborhood, and might transform it socially but it's better than letting it fall apart or be some burned-out husk of a former city". And I think that a lot of critical urban scholars are trying to push people to ask why we can't have upkeep and can't have proper care for buildings, without it coming along with the displacement of incumbent residents who you know, oftentimes have been through the bad days in a building or in a neighborhood, and then get pushed out right before the improvements come. So speaking now, specifically about housing, about rental housing, I think the bigger question to ask is like, why do we let landlords who own these buildings and collect rents every month, maybe it's like the lazy landlord or maybe it's the mom-and-pop who is a slumlord, why do we let them get away with that? Can we not do a better job with property standards and ensuring that buildings are maintained properly, if you own a house, you should fix it up, you have been collecting rents from people, you should have a capital repair fund. I will say that if you live in cooperative housing, or if you live in public housing, the managers of that are required to put away a certain amount of money every year into a capital repair fund. And then to fix the roof, to fix the boiler to maintain these things, it's a part of running the property. And so when landlords don't do that they're not doing their job properly. And so I like to point that out rather than celebrating financialized learners who come along, find me do this sometimes, like long overdue repair, but then only do it because it can be used to like line the pockets of their investors, and their executives.

Shane Phillips 48:01
Yeah, we actually, the Lewis center, we had an event, we have our quarterly housing equity and community series event. And that one was on this question of like, we're good at talking protections, and like enacting new rules and updating the policies, we're not so good at actually enforcing them. And that includes these building code enforcement things where, you know, the rules are all on the books that you can't, you know, let people's water turn off or not have hot water, not have electricity, those kinds of things. But actually following through on the enforcement, is something we... almost nowhere really does very well. Alright, well, I know we got to let you go. But I always want to make sure to ask, Is there anything In this work you're doing, any unanswered questions you still have or anything you wish we would have asked that you still wanted to bring up?

Martine August 48:57
I think you guys asked a lot of questions. And I hoped.... I don't know, I hope you enjoy talking about financialization of multifamily housing. It's definitely something that I love talking about. So it's really nice of you to invite me on your show to chat about it.

Shane Phillips 49:10
We're so glad to have you. And thank you very, very much for talking about it with us. We really liked having y'all.

Michael Lens 49:17
Yes, it's been fantastic Martine and Shane and I don't probably come with anywhere near I know, we don't have anywhere near the depth of knowledge on this particular topic. This is pretty far field for us. So I hope we didn't ask any obviously stupid questions. And I'm proud that we didn't say something like, you know, how is this applicable to the United States because it seemed pretty obvious along the way. This is very clearly applicable to the United States and we didn't need to ask that

Shane Phillips 49:48
Our markets are shockingly similar housing markets and policy.,

Michael Lens 49:50
Yes

Shane Phillips 49:58
Episode Six is a wrap, thank you again to Dr. August for the conversation today. The shownotes have any citations or papers we mentioned during the interview, and you can also find our own notes on the paper and a transcript of the episode at our website, lewis.ucla.edu. UCLA Lewis center is on Facebook and Twitter. I'm on Twitter @ShaneDPhillips and Mike is there @MC_Lens but remember to show us some love with a glowing review if you could and we will see you next time.

Transcribed by https://otter.ai

About the Guest Speaker(s)

Martine August

Martine August is an assistant professor in the School of Planning at the University of Waterloo. Her research focuses on housing, urban redevelopment, financialization and urban social justice.