There is rent and then there are “rents.” Everyone is familiar with rent that one pays to a landlord, residential or commercial. The field of economics defines “rent” as money that accrues to someone who controls some scarce economic resource and is able to charge a premium over the cost of production merely due to this control. Examples include guilds and trade unions, which can often limit the supply of practitioners of a craft and entities that control the pricing of resources constituting natural monopolies / oligopolies such as OPEC. In our current deregulated world large banks, trading firms and so forth are spectacular rentiers with respect to charging a premium for access to capital*.
In a linguistic irony, private equity firms and other financial rent seekers are actually beginning to enter the normal “rent” business. The sharks are beginning to circle around the wholesale foreclosure auction business And rent-controlled apartment buildings with an eye towards exercising enough market power to influence residential rents and shifting as many operating costs as legally permissible to residents. In New York, private equity is buying up thousands of rent-controlled apartments and attempting to force current residents to leave through legal and other means, as this is the only way such investments will show the type of return these “investors” are seeking.
In many ways, this is the next logical step (by today’s crony capitalist logic at least) for moneyed players in the housing market. Already, well capitalized property developers, realtors with access to large lines of credit are often the only parties able to make the cash purchases required to buy up foreclosed properties. Such parties are typically able to be well compensated for their intermediary role by doing the minimum required work to make retail lenders comfortable lending to homebuyers under standard mortgage requirements. In some cases, these middlemen can raise the price of a home by tens of thousands of dollars above the cost of the work done in just weeks (in some cases, no work is done, the buyer simply has a sweetheart deal with realtors, keeping even the selling bank in the dark). A recent story on WBEZ sheds some light on this phenomenon.
So now the big fish want in on the rental market. Home ownership has plunged, existing rental inventories are relatively tight. A well capitalized equity fund can buy up scores of properties at a time with near zero interest on the capital and banks are all too happy to do one transaction for hundreds of properties.
The whole scoop is here in a recent post at Naked Capitalism.
This same process (pushing the frontiers of rent-seeking) is playing out in for-profit education. Some doctors too are already wincing at the potential implications of cost-cutting mandates on individual medical practice with predictions that eventually only large hospital chains and insurance companies may be able to afford to deal with the slim margins that primary care providers may be facing shortly.
The common thread in all of this is that much (most?) of the “allocation of capital” these days—which is, after all, the raison d’être of the finance sector—is doing nothing to improve productivity, fund new economic activity or to contribute to a dynamic economy. In all these cases it is simply being used by a well-connected financial elite to capture existing revenue streams that feature a distressed seller and/or a captive consumer. These acquisitions are then squeezed for every penny they are worth and then some. Time will tell how far this trend will go. But with the current lack of political will to take on the rentier class, it may go very far indeed.
Another recent NC post discusses the irony that much of the money used by private equity firms is public pension, state and sovereign investment funds. So it is often the retirement money of average citizens being used to fleece them today.
* (with retail banks, even depositors access to their own funds are charged a rent in the case of ATM machines, which typically carry fees orders of magnitudes higher than the cost of operating the machines and vary by as much as 200% or more between different machines.