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    AZBEX
    Home » Editorial Analysis » Our View: Institutional Investment: More Good Than Bad
    Editorial Analysis

    Our View: Institutional Investment: More Good Than Bad

    BEX StaffBy BEX StaffFebruary 4, 2022No Comments15 Mins Read
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    By Roland Murphy for AZBEX BEXclusive

    It will probably come as no surprise to regular readers of my columns that News Analysis and Media Criticism were two of favorite classes back in college. Today’s outing will be a rare adventure in both.

    There are a few reasons I targeted my training exclusively toward print reporting rather than broadcast journalism. The biggest reason is broadcast’s superficial detail. A three-minute piece is considered “long form” in standard TV news. That comes out to approximately 450 words, a little more than one-third of a magazine page if there are no pictures. That’s enough for “spot news” like a crime, car crash or other specific event. It’s barely enough to even introduce a major trend or topic, much less present any useful information about it.

    Another issue with broadcast is the rarity with which broadcast journalists cover assigned beats anymore. You hardly ever see an education reporter, crime reporter, development reporter, etc. Staff and budget levels require nearly everyone to be a jack of all trades and master of none. There is little to no opportunity to actually develop expertise in a given area of coverage.

    All this leads us to the media criticism portion of today’s column. AZfamily.com is my preferred local TV news outlet. In my opinion, they have some of the best staff, including a few actual reporters rather than journalists, and tend to give the best coverage of general news.

    A February 1st story by Investigative Reporter Morgan Loew and Investigative Producer Cody Lillich, however, really dropped the ball or stepped beyond The Pale.

    Before we dive in, I want to make it clear I have no quarrel with Arizona’s Family, Loew or Lillich. The outlet is still my preferred choice for local news, their investigative staff includes some of the best reporters in the state, and I do not know Loew or Lillich personally nor in any capacity beyond their work at the station. This is a dissection of one story and its associated issues on a topic we cover in nearly every edition, not an indictment of any person or outlet. The only axes we’re grinding are sensationalism and inaccuracy.

    The Story

    Using an appearance by noted Arizona economist Elliot D. Pollack before the Arizona House Commerce Committee as a news peg, the piece started out reinforcing what people who follow the housing market already know, but which is likely not part of the average viewer’s day-to-day news stream – specifically that housing affordability for working class professionals like nurses, teachers, etc. is evaporating at an alarming rate.

    That’s indisputably true and one of the biggest social problems facing Arizona by any pragmatic measure. However, from the beginning Loew intimates there are sinister forces at work, saying, “Economists will tell you the problem is all inventory. There are simply not enough housing units in the Valley for all the people moving here and for the young people who are moving out of their parents’ homes. But we looked through thousands of real estate records that are on file with the Maricopa County Assessor’s Office, and we found another potential reason and nobody’s talking about this one.”

    The piece then discusses the fact that rents here are high and going higher before going to snippets of Pollack’s presentation. Pollack is one of the state’s leading experts on the economics of housing and has published extensively on affordability. He is among the most-cited sources for reporters covering housing and affordability. In his testimony, as reported in the piece, Pollack reported the median home price has increased 216% since 2000, with the median income only rising 48.8%, and presented the possibility that by 2025 only 21.8% may be able to afford buying a home.

    The report also highlighted the impact rising prices has on workforce affordability, noting that people in many occupations – such as police officers, firefighters, teachers, construction workers and others – are already priced out of the homebuying market and are facing increasing challenges when it comes to renting.

    Elliot D. Pollack’s slide showing various occupations and their incomes in the current market. Credit: AZFamily.com

    Loew reports, “Pollack says the only solution is to build new homes and apartments, and lots of them.”

    The story then cuts to Pollack testifying, “You need to do something at any price point for all income levels, but certainly at the affordable level.”

    And here’s the point where the piece goes off the factual rails and over the cliff of sensationalism and supposition. Cutting to a shot of someone typing at a keyboard while data tables scroll on a monitor, Loew says, “But we found something else buried in thousands of lines of data from the county assessor’s office: Wall Street investors and private equity investors are buying up thousands of homes and setting the rent prices as high as they want to.”

    Credit: AZFamily.com

    It should be pointed out that the recurring tag at the bottom of the screen reads: “MANIPULATING VALLEY REAL ESTATE PRICES.”

    After this proclamation, the story cuts to a discussion with a local housing advocate who calls out investors for their avarice. He does, however, accurately point out the basic market truth of supply and demand and says that prices are going to go up when there are not enough housing units to go around, reinforcing Pollack’s central point.

    Cutting back to Loew in what looks to be the station’s floor control area, he says, “Not only is it tougher to afford to buy a home now, but those rent increases are literally sucking money out of our local economy. Every $200 in extra rent is $200 that people are no longer spending at local restaurants and shops, and it’s going into the pockets of landlords who are increasingly these big institutional investors.”

    The Reporting

    I’m going to delve now into journalistic standards and ethics for a bit. If that’s not of interest to you, feel free to skip down to the next section.

    There is an almost universal reflex to go for the most dramatic, sensationalist or hyperbolic ends when it comes to delivery and packaging of information. One of an instructor or editor’s biggest ongoing challenge is to keep that reflex in check and keep reporters focused on the facts and the core issues.

    From the beginning of this piece, sensationalism was a driving force. That “MANIPULATING VALLEY REAL ESTATE PRICES” tag showed up even as the story was being introduced from the anchor desk. In setting up the story, anchor Yetta Gibson said, “Affordability is about to plummet now…” giving the impression that it’s on a precarious precipice rather than part of an ongoing multiyear trend and that a catastrophic event is imminent, which neither the story nor any outside data source I’ve encountered in all my time covering this has ever intimated.

    Then it goes over to Loew who launches the story as we quoted above, talking about economists saying the solution lies in supply but that his investigation and review of “thousands of real estate records” has turned up a potentially shocking – and thoroughly nefarious sounding – circumstance and, ‘Nobody’s talking about this one.’

    Nobody?

    The distinction between investigative reporting and on the spot news is research, and this claim doesn’t stand up to even the first page of Google results in a search of “Arizona housing institutional investment.” That first page brings up reports from a range of local news outlets (12News, Phoenix Business Journal, AZ Big Media) and national analysts and news sources.

    The topic was even mentioned in another AZFamily report from Jason Barry back in November that appears to have since been removed from the website. The Arizona Republic has mentioned it several times, as have other outlets. The story’s implication is that researching the current piece turned up a new revelation. It did not.

    Loew’s piece also violated a cardinal rule of reporting: Objectivity. Except in commentary or analysis pieces, the taking of a particular stance is an absolute no-no. Even then, if one perspective is offered up as evidence, the counterargument has to at least be presented. By featuring a housing advocate decrying corporate investors’ greed, without once mentioning even one potential benefit from institutional investment in the market, the piece takes an unrecoverable, and ultimately indefensible, stance. There are literally dozens of resources and spokespeople available to speak on the institutional investment impacts in the Phoenix housing market. I don’t know if Loew attempted to make contact with any of them. I do know he didn’t make any mention of them.

    Lastly, in a sensationalist conclusion rivaled only by the earlier assertion about the “discovery” of institutional investment “buried” in real estate records – which implies they were deliberately obscured – the story makes the only partially correct and exceptionally narrowly focused claim that non-local investors are “literally sucking money out of the local economy,” implying a state of crisis and parasitism far greater than the mere state of affordability.

    With the exception of the coverage of Pollack’s testimony, the entire piece is hyperbolic, sensationalistic, biased and a disservice to both the viewers and the general public.

    The Facts of the Case

    “A Few Good Men” is one of my favorite movies. It’s a treasure trove of good dialogue, but my favorite line is not one that gets much attention. It’s from the beginning of the trial when Kevin Bacon as the prosecutor is making his opening remarks. He lays out the details of the case and the evidence and informs the jury, repeatedly, “These are the facts of the case, and they are not in dispute.”

    As dozens of local news and industry reports dating back to at least 2016 show, institutional investment in the Arizona housing market is a real force. A December 2021 report from Roofstock.com shows metro Phoenix as the leading U.S. market for investors buying homes. In a market where monetary policy has made available a swirling sea of capital, investors are chasing yield wherever they can find it, and housing is one of the most productive sectors in terms or return.

    That same article explains why in a series of easily digestible bullet points. Phoenix is a better market for renting than for buying at the moment, with a price-to-rent ratio of 25.9. (A ratio of 1-15 supports buying as the better option. The higher the number, the better renting becomes for consumers.)

    Other points mentioned include the Valley’s dramatic rate of population and job growth, comparatively low median age, and significant gains in home prices and rent rates.

    A MarketPlace report from last April detailed the increasing difficulty individual buyers who need to finance a home purchase are facing as they compete with investors who are able to make cash offers. There have also been multiple reports addressing this in Arizona media.

    On the multifamily side, CBRE’s Phoenix institutional investment page for multifamily shows a total market consideration of 1,000 transactions, 312,000 units and $35B.

    These are the facts of the case, and they are not in dispute.

    The Demonization of Outside Investment and the Realities of the Market

    Loew’s claim about Wall Street (as a euphemism for non-local) investors “literally sucking money out of our local economy,” is true under an exceptionally narrow focus, but wildly inaccurate in the bigger picture.

    A June 2021 article in Vox makes the case that Wall Street is not to blame for the market chaos. Author Jerusalem Demsas asserts: “It’s important to understand that institutional investors play a small role in the American housing market. While there are big firms for apartments and other multi-family housing units, there traditionally hasn’t been the same level of investment in single-family homes. Yield-chasing investors have turned to the real estate market because it has become a very profitable place to put your money. And the main reason it has become so profitable is the preexisting housing shortage created by local governments and certain homeowners seeking to block new homes from being built, leading to a nearly 4 million home shortage nationwide.”

    Institutional home purchases are down versus the historical average. Credit: Vox

    While it is true that investors are buying properties and raising rents, they are not setting rents “wherever they want.” Rents are determined on a competitive basis, and charging all the market will bear is not in any way the same as setting them “wherever they want.”

    In Barry’s now-removed November story, he even mentioned that some owners appear to be nudging rates downward. This could be construed to mean some fear they have set rents too high to remain competitive.

    The core reason home prices and rents are going up is not outside investors imposing prices at will. A Millionacres.com Phoenix Real Estate Investment Forecast from April 2021 highlighted all the reasons clearly.

    • The housing supply stood at 1.2 months, -1.23 Year-over-Year.
    • Rental occupancy was 96.1%.
    • The architectural billings index for the West region was 42.8, -9.3 Year-over-Year.
    • Construction costs were up 6.7% Y-o-Y.
    • Construction jobs were down 1,300 Y-o-Y.

    None of these indicators have gotten much better in the year since, and many have gotten markedly worse.

    BEX’s own data largely confirms Demsas’ reporting in Vox as to the comparatively small volume of investor ownership in the overall market. In one of the most entertaining slides presented at the 2022 Forecast event, a breakdown of multifamily development project owners in Arizona showed 290 different owners, with even the largest holding fewer than 2% of projects.

    FP EA TRN Institutional Pros and Cons – Owners

    The Benefits of Investment

    As Loew noted, Pollack, the general economic community and industry experts all assert the only path to greater affordability is increased supply. With occupancy rates now hovering around the 97% mark, there is simply too much demand for housing for new units in the Valley and around the state.

    What Loew failed to note is that new supply arises from investors seeking a place to put their money and earn high returns on their investments.

    In the BEX Companies 2022 Forecast Event (AZBEX, January 18th) last month, we pointed out that single-family building permits totaled 51,200 in 2021, up from more than 40,000 in 2020. 2021 multifamily permits were 20,200, up from more than 16,000 in 2020. Investment appetite is a key driver to that increased pipeline.

    A recent conversation with Thomas Brophy, research director at Colliers in Arizona, shed light on another important contribution investment dollars are making to the Arizona economy: Renovations. Brophy said, “While multifamily sales and investor interest in Phoenix multifamily capture most headlines, the improvements made to existing housing stock largely gets unstated. From a ‘back of the napkin’ analysis, there are approximately 190,000 multifamily units built prior to 2000. Since 2015, over 50% of those units are estimated to have undergone varying degrees of restoration.” He went on to estimate those renovations total of approximately $250M/year in activity.

    That investment appetite is also what’s fueling record levels of sales in both single-family and multifamily properties. Multifamily transaction volume in 2019 was a little more than $7B, dropping to $5.45B in 2020. The market rebounded significantly in 2021, exceeding $14B in metro Phoenix.

    In addition to sales of existing properties, that drive for returns is a key force behind the booming construction market. Multifamily development made up 21.8% of the total Arizona construction market, or $4.06B.

    To note that non-local owners are sucking money out of the local economy by pocketing rents, while ignoring $14B in transactions, $4B in construction and $250M in renovation – the latter two of which remain primarily in Arizona – is grossly biased and irresponsible.

    While workforce affordability is a major social need in the state, its only cure is added supply, and the investment market is a key contributor to creating that supply.

    Unless you’re operating under Josef Stalin, Mao Zedong or Lyndon Johnson, housing units are not delivered to address a social need or agenda, but to satisfy market demand. Leaving aside its controversial social policies, Levittown – one of the most important housing shifts in U.S. history – was not created out of a sense of social obligation because G.I.s returning home after World War II needed places to live. It was built because the builders saw a market need and executed a plan to satisfy it for the benefit of their company and its customers.

    Fueling Existing Problems

    Loew’s story is troublesome not only because of its sensationalism and lack of objectivity, but also because it will almost certainly add fuel to the dis- and misinformation preached as gospel by the anti-development forces both in opposition groups and, increasingly, at many layers of local governments around the state.

    “We don’t need more apartments to line the pockets of greedy investors and developers,” is a common refrain among these groups, and the latest story will almost certainly be added to their basket of “facts” supporting their opinion.

    Meanwhile, as Demsas noted in Vox, the real problem with affordability remains a lack of supply, and a major hurdle to delivering that supply is opposition to essential new developments.

    While there is certainly room for opinion and evaluation based on the reams of data and “thousands of real estate records,” there is no room for distortion, hyperbole and sensationalism. The industry, the market and the viewing public deserve better.

    Arizona House Commerce Committee Arizona’s Family BEX Companies building permits capital markets Cody Lillich Colliers in Arizona Elliot D. Pollack FP EA TRN Institutional Pros and Cons – Owners housing affordability housing crisis housing supply In-migration institutional investment institutional investors Maricopa County Assessor’s Office millionacres.com monetary supply Morgan Loew Phoenix Real Estate Investment Forecast population growth rent growth Roofstock.com Thomas Brophy trends Wall Street workforce affordability yield
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