What is a “developer”, in the real estate sense? The term is used with a rather generous amount of ambiguity – sometimes referring to landlords (albeit of a particular type – that is, firms with large portfolios), sometimes to an entity which purchases unimproved land for summary construction, sometimes to an entity which links both of the previous – buying land, initiating construction upon it, and then taking ownership of the finished product as a vehicle for further profits through the sale of leases, sometimes merely a “property manager”. These are all more or less accurate. We may say, for the sake of this post, that developer as a term refers widely to those capitals engaged in land property but which do not actually engage directly in construction upon it (though there are developer-contractors out there); that is, though they may be engaged in land property and thus derive a certain absolute rent in accordance with the principles of inter-sectoral competition, they are not engaged directly. Their relationship with land property is (ahem) “mediated”, in this case by the intervention of particular monetary and financial instruments that allow their land holdings to be bought, traded, securitized, etc. like more typical finance capital which enjoys nearly limitless fluidity.
The difference between construction and development as it relates to land property (direct and indirect land ownership, maybe?) requires some further elaboration. What’s particularly at stake is the old and rather tiresome imputation of differences between small and large landlords as economic figures, or to be more precise, as capitals of varying sizes. Put another way, there is a question here of competition, both within and between sectors, that allows for me to overcome problems of accounting specific to developers (hereafter “landowners”) but not foregoing a more penetrating analysis of firm size and the overall market in landed property. That said, the major issue for empirical analysis at the regional or national level (where competition truly takes hold) is that the “rules”, so to speak, of economic asset reporting and ownership are absurdly slanted for the benefit of the landowner. Consider New York City. A long-running problem for tenants and tenant organizers is the sheer unavailability of reliable or even accessible data on who owns and manages their property, especially when it comes to multi-family structures of 4 or more units. The exceptional “Who owns what?” site which allows for landlord lookup with an address in NYC comes very close to solving this problem in a practical way, but as its Methodology page states, this is more algorithmic guesswork to create a reasonable best guess at property portfolios than any true insight behind the curtain. This is not a problem only in New York, of course – LLC ownership nationally rose, according to the JCHS’s “America’s Rental Housing 2022” report (citing the US Census’ Rental Housing Finance Survey"), to 26% of total rental housing nationally in 2018, and has likely risen further (though the vast majority were purchases in single-family residential). That said, the vast bulk of non-individual owned properties were multi-unit:
What this means is that, at least in an urban context, a good number of apartment buildings with 24 or less units are owned by individual landlords, regardless of how many LLCs may predominate to obscure their identities and insulate them from legal reprisal or tenant organizing.
A second issue in accounting terms lies in the fact that the forms these non-individual investors may take are legion in number. Perhaps the one form getting the most press recently is the REIT, or Real Estate Investment Trust. However, their presence in residential is rather underwhelming. Nareit’s REITwatch for May 2022 lists only 17 REITs involved in residential apartments of their list of 152 which comprise the FTSE Nareit All Equity REITs list (the majority are in retail) with an implied market capitalization of nearly $169 million. Other measures, like the Wilshire US REIT Index, are benchmark representations of total real estate security trades (meaning they only track exchanges of financial representations downstream of the actual land/property itself) and thus are not exactly useful metrics of firm activity.
That said, we can make several assumptions: first, the bulk of land property is owned by individual investors, even if we control for and remove owner-occupiers from our analysis. Secondly, and bear with me here, real estate capitals (individual and otherwise) are only engaged in competition within their specific regions. Though a seller may compete for a buyer between, say, NYC and Minneapolis, the simple fact is that if a person wants to or must move to NYC they will not be looking at Minneapolis apartment listings. So, for example, when a massive capital firm like The Related Companies has a vast portfolio including holdings in Boston, NYC, Chicago, Miami, and LA, that doesn’t necessarily mean they function as a player in that rental market of a similar, national scale. The utility of such a geographically distributed portfolio is in allowing the central firm to weather regional downturns and crises, not in being able to bring their size to bear, due to the specific conditions of that given market in which turbulent competition arrives at a particular price.
Ok now on to the good stuff. We now know most owners of property in the US are individuals, but there are several large, highly capitalized firms which control and administer vast swathes of property. But do these large firms lead the market? Put another way, are they the regulating capitals of rental real estate – do they establish what Anwar Shaikh calls “the best generally reproducible condition of production in that industry…the lowest reproducible (quality-adjusted) costs in the industry”?
This notion of “reproducibility” is crucial here in setting conditions for market entry into a particular sector, in this case rental real estate. Rental real estate may be acquired by an entering capital either through an outright building sale, by throwing rent stabilized tenants out of their units, or by coaxing land or a non-residential structure through the construction process in order to gain ownership of a sufficient and rentable residential structure ready for the market – quite a range of possibilities over those confronting a would-be capital entering a production market, which has far more clearly defined technology and employment requirements and attendant best practices. For this little post, I’m not really concerned with the reasons for entry (which I’ve kinda covered elsewhere and will again, and are related to inter-sectoral rates of profit) but simply the intention to enter. Anyway, we have established that the condition for market entry is ownership, of anything from a single room or unit up to a huge complex of 25-50 units or more.
In land ownership/the rental real estate market, the reproducible conditions of ownership are those which are the highest cost ones in use. Thus the regulating capitals are those which pay the most to bring their units to market. In the sense of building ownership, it stands to reason that the largest units are those which demand the highest costs – be it for the outright purchase (and subsequent need to amortize), maintenance and staffing costs, etc. The reason why the regulating capitals are those which spend the most on fielding units for market are twofold: on one hand, they bring a dramatic amount to market at any one time, enough to temporarily assume a position of direct price leading (or price setting, if you want to be a bit neoclassical about it), and thus set a price high enough to derive a consistent profit notwithstanding the already onerous unit costs they sustained. This constitutes the regulating condition of ownership.
If this seems absurd (how many people live in Manhattan towers anyway?) keep in mind that the vast majority of new, especially ex- or suburban construction is undertaken on a tract basis by a single developer and then sold to individual owner-occupiers; these developers operate in a regulating position to overall tendentially bring prices up for their immediate region. All other firms become price-followers, who adapt their own selling practices to those of the price-leaders; to put it simply, the owner of a 6 unit brownstone may raise asking rents because the new 30 unit building on the corner already did. This probably seems obvious, if you’ve ever rented an apartment before. But to think of the price established by the 30 unit building as solely a monopoly power display is erroneous: if anything, it is simply a pure desire for amortization as quickly as possible. If the rent falls after several months of vacancy, the leases become available for distress sale conditions, but these price cuts are still limited by overall production costs (or sale costs) in the initial creation or capture of rental real estate.
The price-leading function of the regulating capital as the firm establishes a temporary and turbulent regulating condition of ownership has overall effects on the regional market. By dragging up the baseline price (at least, if all goes well, and leases start selling), our good old individual owners would be foolish to not respond. After all, for them, their own conditions of ownership are actually far more amenable to higher profit margins and profit rates; in all likelihood, their own costs for maintenance or their mortgage payment did not change – so following along the new local rental ask into the heavens only unlocks further potential for exploitation on top of their already exploitative asking rent. Their profits explode in the form of residuals. The lower the conditions of ownership for a piece of rental real estate, the greater profit stands to be made. A rising tide lifts all boats, you could say. If you’re a landlord.
Lastly, you could say this is at least a part of why gentrification is such a runaway process and nearly unstoppable in its onslaught, but I won’t, because I’m tired and this post has already gone on long enough.