The Rise Of Residential REITs In The United States

A suburban residential community in Thousand Oaks, California.

The housing market in the United States has long been shaped by a combination of unregulated private enterprise and strict public regulation. As America’s housing market grows, the relationships between landlords, tenants, investors, and local city governments have become more complex. Central to this landscape are residential real estate investment trusts (R-REITs), an often overlooked yet substantial aspect of the housing market.

In general, a real estate investment trust (REIT) is essentially a company that owns, manages, and controls properties such as apartments, office buildings, or shopping centers. It then allows people to invest in these properties without buying one themselves. It’s quite similar to how a stock market works: instead of buying an entire building, you can just buy a share of an REIT’s investment portfolio that consists of hundreds of buildings, thus lessening your financial risk.

A residential REIT (R-REIT), however, is subcategory of REITs that focuses specifically on housing. As the R-REIT buys and controls thousands of apartment units across cities, investors buy shares, and the profits from the rent collected are distributed to the investors. This effective setup allows larger companies to invest heavily in housing, which sometimes even gets to the point where they own a monopoly in a local housing market.

In order to better understand the intricacies of the REIT market, we must understand its history. Before 1960, only wealthy individuals or big corporations could afford to invest in real estate like office buildings, rental homes, and apartment complexes. The average person had very little opportunity to earn money from real estate unless they directly bought and managed it.

However, all of that changed with the Real Estate Investment Trust Act of 1960, which was signed into law by President Dwight D. Eisenhower. The purpose of the legislation was to make real estate investment accessible to all Americans, not just the wealthy. Under the legislation, REITs allowed people to buy shares in investment portfolios of income-producing properties that were owned and managed by professionals. In return, these trusts were required to return at least 90% of their portfolio income to investors as dividends.

Former U.S. President Ronald Reagan signing the Tax Reform Act of 1986 into law.

By the 1970s, REITs had become a small yet integral part of the American housing market. However, when high inflation and tax laws created instability within the real estate market, the REIT market almost reached the brink of collapse. Thankfully, the passage of the Tax Reform Act of 1986 served as a turning point. By eliminating the many real estate tax shelters that individual investors used, it made REITs much more appealing by legitimizing it as a transparent and effective way to invest.

Furthermore, the urban, suburban, and rural distributions in America changed quickly. Because many Americans were moving to urban areas for work, the demand for multi-family housing, such as apartment complexes, was growing rapidly. Thus, investors began to realize that residential properties could not only generate consistent rental income but also gain long-term appreciation, as an apartment complex’s value would only grow over the years. This set up the foundation for the golden decade of REITs.

As we enter the 1990s, we see how REITs are truly “proper.” After the Resolution Trust Corporation—a U.S. government-owned asset management company created to clean up failed savings and loan institutions—sold off vast numbers of its foreclosed real estate following the financial crisis of the late 1980s, REITs were perfectly positioned to benefit from buying these assets.

Furthermore, the U.S. also saw bigger corporate expansions of R-REITs. For example, the Equity Residential REIT was founded by Sam Zeli in 1991, and it became one of the first large-scale R-REITs. Other major corporations and investors soon followed, like Avalon Bay Communities, which focused on owning and renting thousands of apartment complexes across the country.

During that era, it wasn’t only large investors who saw benefits; smaller investors hugely benefited too. When REITs were brought to the stock market, it became much more accessible to small investors because it allowed anyone with a brokerage account to invest in REITs. This solidified REITs’ place in the American housing and stock market.

The growth of REITs from 1992 to 2012 in terms of their total market capitalization, as well as the mean, or average, and median values of their total assets (via researchgate.net).

In the 2000s, R-REITs, in particular, experienced controlled growth as they benefited from expanding student housing, senior living facilities, and single-family rental homes. However, the 2008 financial crisis, created by the housing bubble, changed the landscape for R-REITs dramatically—but mostly in a positive way (after a brief dip). Because traditional homeowners and smaller landlords faced foreclosure and bankruptcy due to the burst of the housing bubble, wealthy REITs got a great opportunity to purchase large amounts of properties at a discount. This jump-started America’s shift from individual real estate ownership to corporate ownership, marking the beginning of large-scale, corporate-managed rental housing in the U.S.

As we enter the 2010s, R-REITs have already become a major player in the housing market. However, this era further cements their position as an important piece in the housing market. As the economy recovered, homeownership for the new generation still remained low, as renting became the norm for younger individuals. With this shift in cultural norms, R-REITs now receive an endless stream of tenants and reliable rental income.

Today, in the 2020s, R-REITs own and manage hundreds of thousands of housing units across the USA. They are particularly popular in the urban hotspots of America—New York, Los Angeles, and Seattle—where the demand far outstrips the supply.

From their humble beginnings in the 1960s to the current global market they demand, residential real estate investment trusts have grown rapidly into becoming one of the most powerful players in America’s housing market. What began as an idea of equity for Americans by enabling them to have a share in the profits of property ownership has gradually evolved into a complex, potentially even corrupt ecosystem where massive corporations command the housing market.

Ultimately, despite any of the harms or benefits that R-REITs have brought, they tell the story of the changing priorities of American society, whether it be from postwar suburban expansion and traditional homeownership to the astronomical rise of rental properties or from the 1980s tax reforms that revived real estate to the 2008 Financial Crisis that allowed corporate housing to flourish.