CoStar, RealPage, CoreLogic, & John Burns: The Four Consultants of the Real Estate Apocalypse
ProPublica recently published a piece about real estate consulting firm RealPage and their YieldStar software. YieldStar gives landlords the information they need to find the highest rents a market can bear. Author Heather Vogell writes:
To arrive at a recommended rent, the [YieldStar] software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge. For tenants, the system upends the practice of negotiating with apartment building staff. RealPage discourages bargaining with renters and has even recommended that landlords in some cases accept a lower occupancy rate in order to raise rents and make more money. One of the algorithm’s developers told ProPublica that leasing agents had “too much empathy” compared to computer generated pricing. Apartment managers can reject the software’s suggestions, but as many as 90% are adopted, according to former RealPage employees.
In other words, YieldStar’s bots find the information and make the decisions humans are too human to collect and make.
Besides algorithmically jacking up prices, YieldStar lets landlords know when to push tenants out of their homes in pursuit of higher rents. Increasing turnover to increase revenue runs counter to conventional wisdom, where landlords seek to promote stable tenancy and rental income. But YieldStar’s algorithms found increased profits and tenant churn were not mutually exclusive. One of YieldStar’s early testers, Camden Property Trust, increased their profits by 7.4 percent even though tenant turnover increased 15 percent.
RealPage is one of a handful of large real estate consulting and analytic firms catering to institutional developers and investors, telling them what, where, and why to build and invest in — though the “why” is invariably making as much money as possible with as little effort as possible. The other big players in this sector are the CoStar Group, CoreLogic, and John Burns Real Estate Consulting.
For reasons I detailed in previous posts, many of today’s real estate decisions have shifted from being made by local developers and investors working with local capital, building location-specific real estate to a cabal of behemoth firms (usually real estate investment trusts, or REITs) backed by global capital markets, cranking out generically-designed, investment-grade assets. Because these new school developers and investors are often not real estate specialists and have little connection to what they’re building or investing in, they rely on the “intelligence” of the aforementioned firms. As the ProPublica piece attests, these firms deliver decisions that promote huge returns-on-investment while artificially driving home costs up, diminishing the wealth of average citizens, squeezing debt markets for all they’re worth, promoting the construction of cheap, unsustainable real estate, and bringing real estate markets — as well as the greater global economy — closer to collapse.
How Did We Get Here?
The proliferation of fiscally parasitic, regionally-undifferentiated, and unsustainable real estate in the U.S. went into overdrive in the wake of the subprime mortgage crisis, later known as The Great Recession. In 2008, president Bush signed the Emergency Economic Stabilization Act (aka the bank bailout), which earmarked $700 billion for the troubled assets relief program (TARP). Instead of punishing banks for issuing mortgages to unqualified individuals and entities, TARP gave banks, developers, and institutional investors cash and debt to buy those troubled assets from their erstwhile owners. TARP funds were also deployed to purchase collateralized debt obligations (CDO), refinancing mechanisms for mortgage backed securities (MBS). In short, banks spent years issuing dodgy mortgages to unqualified borrowers and when payments couldn’t be made — on the individual mortgages or their bundled, bonded, and tradable securities — TARP gave institutional buyers money or underwriting to buy them back at an extreme discount.
When the government rescued banks rather than citizens in 2008 and the years after, it signaled to investors there was no amount of fiscal, social, or environmental recklessness the government and Fed would not rescue them from. The foreclosures and related bad press also taught banks to stop issuing mortgages to the non-rich. Instead, purchasers of low-cost, distressed assets held, rehabbed, and rented them out rather than selling them. Holding and renting presented big advantages over built-for-sale properties and issuing mortgages to individuals or small businesses:
- Equity gains stayed with the banks, developers, and investors, not homeowners. That equity could be used as collateral to secure additional debt to buy, build, hold, and rent more real estate assets.
- Rents, unlike prime-rate-connected mortgages, could be increased ad infinitum, similar to what YieldStar does.
- Evicting renters was far less controversial than foreclosing on a homeowner. This latter distinction is likely why the 2008 bailout elicited far greater protests than 2020.
Prior to 2008, single family homes were largely built-for-sale, since the American dream is so enmeshed with homeownership. But this changed following the 2008 crisis. Investors were sitting on tons of discount assets. Financially depleted consumers faced new, tighter mortgage lending policies. All of this resulted in “built to rent” (BTR) single family home developments becoming America’s fastest growing housing sector.
The post-recession, investor-centric real estate market also moved away from expensive, high barrier markets like New York and California to “expansive” tertiary markets with limited regulation and favorable tax policies like Arizona, Utah, Texas, the Carolinas, and Florida, despite the respective environmental threats these areas posed (flood, drought, extreme heat, etc.).
It was in the wake of the bailout that companies like the CoStar Group, CoreLogic, et al came to prominence, providing passive investors cheat-sheets for how to funnel their equity and Feb-backed debt into foolproof, passive real estate investments.
The Market Collapse that Should Have Been
In late 2019, after nearly a decade of constant development of debt-bought, generic, parasitic, unsustainable real estate, I reasoned that a far-reaching real estate market collapse was unavoidable. I saw that rent and mortgage payments and tenancy could not possibly keep pace with the speed of development or the rapid increase in underwriting risk, particularly from novel climate threats.
My response to an imminent market crash came in the form of my startup, the Change Order Group (COG), whose mission was “to ready the world’s built-environment for the environmental, economic, and social challenges of the 21st century and beyond.” Starting in 2019, and for most of 2020 and 2021, I attempted to get COG funding or jobs to prove ourselves. I had the aforementioned analytics firms — CoStar, RealPage, etc. — in my crosshairs.
I had high hopes for COG. With the world falling apart in myriad ways, our mission seemed like a timely, important one. And unlike the empty suits at other firms, I assembled a team of the world’s foremost housing researchers and technicians. COG’s team included Issi Romem, former Chief Economist at the Zillow Group, Darrick Borowski, former Design Chief of Staff at WeWork, Greg Lindsay, Director of Applied Research at NewCities, Mike Eliason, North America’s leading low-carbon, structural timber, and social housing architect, Jon Dishotsky, then-CEO of Starcity co-living, and a few others of comparable repute and experience. My aim was to develop a regionally-adaptable and comprehensive suite of intelligence that optimized real estate for more than short-horizoned, passive revenue extraction. Using robust climate, economic, policy, regulatory, design, planning, and social data, COG would guide developers and investors in transforming their holding in ways that promoted social and community integrity, economic equity and market-rate affordability, asset productivity (i.e. getting more use out of less real estate) and, above all else, climate adaptation. Despite our firepower and urgently needed service offering, we never got funding or a chance to prove ourselves.
I don’t believe I was wrong about a forthcoming market crash that would make 2008’s “Great Recession” look paltry (NB: WWI was “The Great War” before its greatness was marred by WWII). But I underestimated the enormity of America’s fiscal recklessness or the development and investment world’s indifference for doing the right, prudent thing. I should have known the U.S. government would rescue banks, developers, and investors, not its average citizens. Rather than letting markets fail and forcing large property owners to make price and product corrections (i.e. lowering prices and building real estate that fit regional market needs), the government rapidly initiated another stimulus plan that put $1.9 trillion dollars into the Federal Reserve’s balance sheet. Once again, most of the stimulus money was quickly channeled into real estate asset and debt purchases for institutional investors.
The government’s quick bailout was a reflection of how enmeshed the U.S. economy is with mortgage debt. Household mortgage debt alone makes up around 50 percent of the U.S. GDP. In order to avoid a bond market collapse — one that would tap out the cash supporting other markets — the Fed used the stimulus funds to purchase $1.37 trillion of mortgage securities between March 2020 and April 2021. Some of the stimulant money padded bank coffers so they could issue ultra-low interest mortgages and refinances to “well-qualified” borrowers (translation: the people who didn’t need a discount). Some of the money went to developing new construction in response to an ostensible housing crisis, particularly in aforementioned tertiary markets — ones that are now swelling with new inventory after interest rates went back up. Ultimately, most of the stimulus money was filtered through real estate asset and security purchases on its way to making America’s richest citizens — the ones collecting money from investment rentals and mortgage debt streams — $1.7 trillion richer, according to The Nation.
As normal Americans became poorer than ever, as costs of living skyrocketed due to runaway stimulus-caused inflation, as the country’s (and world’s) richest citizens got richer than ever pilfering Fed-issued PPP and real estate funds, as climate-change-caused wildfires and floods devastated major markets, firms like CoStar, Corelogic, RealPage, and John Burns Real Estate Consulting urged developers and investors to keep taking as much debt as possible, keep indenturing citizens to rental payments by building BTR single family tracts, keep moving into environmentally dubious regions, and so forth.
Similar to my previous piece about the broken state of real estate investing and consulting, this piece lacks a happy takeaway. So much damage has been done — funds already spent, bound-for-permanent vacancy investment real estate already built, populations broke. The market collapse I foresaw a few years back has only been forestalled and made worse due to events of the past few years. Debt balances are greater than ever. There’s more ugly, low quality, unproductive, unaffordable real estate than ever — often built on sinking Florida floodplains and parched Arizona deserts. Nothing was learned, and many of the aforementioned agents of destruction are still spewing misinformation.
In my expert opinion, change will likely only come about the hard way: through market collapse, major environmental catastrophe(s), open revolt, or some combination of these events that can’t be treated with more money-printing. While there may not be large-scale, universal, and conventional solutions for avoiding these threats, there are plenty of small-scale, geographically-specific, and radical solutions that can greatly mitigate them. As always, I’d be delighted to help earnest parties identify and deploy those solutions. Drop me a line to discuss.
Notes:
- In this piece I refer to banks, developers, investors, and landlords. Banks refer to institutions originating mortgages and handling cash, credit, and other financial transactions; banks often include real estate mortgages and other securities in their balances, but mainly offload those securities to bond markets; banks also are not building or actively investing in properties themselves. Developers refer to parties responsible for building or rehabbing real estate assets; developers are usually part of the real estate capital stack, so can be classified as investors as well. Investors are defined as those with financial positions in real estate assets, bonds, and other securities; investors can be anyone from investment banks, “accredited” individuals, private equity family offices, or large firms, often structured as REITs, like BlackStone and Goldman Sachs. Landlords, in the context I use the term, is any party taking rental payments and managing real estate.
- The differences in totals and distribution schedules between the 2009 and 2020 stimulus packages are a bit too complicated to unpack here. For more detailed information, visit ProPublica’s Bailout Tracker or The Committee for a Responsible Federal Budget’s, “How Does COVID Relief Compare to Great Recession Stimulus?”
