Keeping Up with the Blackstones: Institutional Investors and Gentrification

Abstract

Policy makers worry that institutional investment in residential real estate drives up house prices and crowds out minority residents. Using mergers of private-equity backed firms to isolate quasi-exogenous variation in concentration of ownership at the neighborhood level, I find that shocks to institutional ownership indeed cause higher prices and rents — but, contrary to popular opinion — increase rather than decrease neighborhood diversity. The reason for increased diversity is that some minorities benefit from the relaxation of borrowing constraints as a result of higher house prices and take out mortgages for home improvement, increasing the attractiveness of their homes; other minorities move in because more rental properties become available as institutional ownership crowds out predominantly white individual home ownership. Institutional investors benefit from increased market values of their houses in increasingly attractive neighborhoods, but also extract value by challenging tax assessors’ valuations and thus reduce their tax bill by an estimated $4.1b nationwide. This is a hitherto unknown source of rent extraction by institutional investors. I conclude that policy makers are right to be worried about some aspects of institutional investment in residential real estate, but they are mostly worried about the wrong thing.

Keywords: Housing, Real Estate, Private Equity, Gentrification

JEL Classification: G11, G23, M20,R30