Saturday Commentary and Review #131
Private Equity and the US Housing Market, Khodorkovsky Urges Armed Rebellion in Moscow, Rust Belt on the Rhine, Rogue Nerds, Asian Sailors in 1587 California
Every weekend (almost) I share five articles/essays/reports with you. I select these over the course of the week because they are either insightful, informative, interesting, important, or a combination of the above.
My parents bought our first house in 1980. It was a bungalow that was built by Italian builders in 1975. Brown brick on a large(ish) plot of land in a new suburban neighbourhood that was far from any significant traffic, it proved to be a great home for a family that was very new to Canada. In only a few short years, hard work and thrift allowed my parents to climb onto the property ladder. Those were different times.
I’ve been to several different countries for business and personal reasons these past two weeks, and the most common subject uniting all these disparate places has been the skyrocketing price of real estate, especially how young people are being priced out of their locales. This has been going on for some time now (in Toronto for well over a decade, for example), but the anger is becoming palpable, replacing the resignation that has seen so many flee for more affordable towns and cities. The consensus is that the social contract that ensured people in the west a steadily increasing standard of living has been torn up in their faces.
Australian conservative and military specialist Gray Connolly likes to say that “you can’t be conservative if you have nothing to conserve”. He has used this line repeatedly on the issue of the real estate market in Australia, another country experiencing the exact same issue as the USA, Canada, the UK, etc. He is right: if you don’t have a stake in your country via ownership of a part of it, why would you care about it? You can just pick up and leave anytime as your country is less country and more shopping mall for browsers and loiterers.
Many will argue that affordable housing supplied by either the government or led by state policy in cooperation with the home building industry is the answer to this vexing issue, but it isn’t as simple as that. Shoddy builds, the price of land purchases, market forces, and so on, make this popular solution incredibly difficult in most cases.
The good news is that things are getting worse. Private equity has been in the housing game in the USA since the 1980s (at least), and private equity firms are now making larger moves in the US housing market. Valerie Stahl argues that this trend is “turning residents into collateral”:
Blackstone Real Estate Income Trust (BREIT) acquired a majority stake in the Hotel Del in 2011 for $600 million. Ten years later, in one of the largest known real estate transactions in San Diego’s history, Blackstone purchased 66 residential complexes across the county for over $1 billion, including Bay Pointe Apartments. Many of the units in these buildings were previously classified as “naturally occurring affordable housing,” meaning that they had significantly below-market rents catering to working families in a city that, like many in America, is facing a stark affordability crisis. Nearly overnight, 5,800 households in America’s “finest city” became tenants of the private equity behemoth.
With this trend only increasing in San Diego—and in cities across the U.S.—it is worth asking: What happens when your home, doctor’s office, or favorite local restaurant gets bought up by private equity?
What happens is that they become hostage to excel spreadsheets.
Already the largest commercial real estate holder in the world, according to the Private Equity Stakeholder Project (PESP), a nonprofit working to bring transparency and accountability to private equity’s various investments, Blackstone is also now the largest residential landlord in the U.S., with an estimated 300,000 rental units across the country. The goal of institutional investors like Blackstone is to optimize profits. On the ground, that translates to maximum allowable rent increases, evictions, the rise of hidden fees, a reduced investment in complex maintenance, and even efforts to influence state and local housing policy. Given the opacity with which Blackstone and other corporate landlords function, it’s hard to say exactly how dramatic the effects are on renters nationwide as compared to general national trends. But zoom in on specific markets or specific private equity firms, and you start to see the increasingly dire impacts.
For example, in Memphis, Tennessee, FirstKey Homes—the single-family home rental company owned by the private equity firm Cerberus Capital Management—was reportedly responsible for twice as many eviction filings than any other rental property manager in the city while also topping the list as the worst building code violator for residential homes by the Memphis Blight Elimination Steering Team in 2018. According to a 2016 report by the Federal Reserve Bank of Atlanta, Atlanta’s largest corporate landlords filed evictions on nearly 1 in 3 of their units, and those households showed a nearly 18% increase in their rate of housing insecurity compared to similar households not renting from corporate landlords. In California, meanwhile, in the past five years alone, Blackstone has spent at least $14 million lobbying against ballot measures that would have limited rent increases across the state. Corporate landlords are increasingly infiltrating the American housing market, from multifamily affordable properties to single-family homes to dormitories to mobile homes, while also contributing to how such spaces are constructed, managed, overseen, and monetized.
I would like to hear Blackstone’s side of the story, as I am sure that there are details that would add nuance to these facts. However, I cannot find anything of the sort.
Real Estate is good business:
At Bay Pointe, in 2021, the average rent was $1,829 a month. By May 2023, since Blackstone’s acquisition, rents ranged from $2,400-$5,500 per month, up a striking 200% in just two years.
An expanding footprint:
In the past two years, according to the PESP, Blackstone has aggressively expanded its acquisition of both multifamily and single-family properties, adding roughly 200,000 units to its portfolio during a pandemic that further deepened wealth inequality in the U.S. Their recent acquisitions include over 71,000 units of affordable housing and at least a partial stake in nearly 55,000 single-family homes, both purchased in 2021. A 2022 research memo from Americans for Financial Reform, a nonpartisan nonprofit coalition, found that private equity firms are now landlords to at least 1.6 million families across the United States. This figure is likely an underestimate. Private equity ownership, also known as institutional investment in real estate, is notoriously hard to track, especially as deregulation has fostered a lack of transparency in investment and holdings, particularly for non-publicly traded companies.
The profit motive:
According to Madeline Bankson, the Housing Research Coordinator at the PESP, “even compared to other corporate landlords, which are also bad, private equity is expected to generate really high returns on relatively short time horizons.” The goal for a private equity firm is “to get a 15 to 20% return—that’s about a twice as high as any other asset class that those investors are going to expect,” Bankson told me, and getting that relies on “screwing tenants over.” This happens through a series of cost-cutting strategies. As Bankson details, “they’re automating property management, they are deferring maintenance, including really serious maintenance—people are having major health hazards in their homes. They’re adding all these kinds of fees and fines, so people end up paying hundreds of dollars more than they think they are going to from the sticker price, and they’re evicting people. And raising rents.”
Here’s a familiar name:
Beginning in 2012, for instance, the real estate investment company of the former first son-in-law, Jared Kushner, began to acquire nearly 9,000 units of housing for predominantly low-income individuals in the Baltimore suburbs. Upon purchase, Kushner’s company pursued hundreds of legal cases against both continuous and prior tenants of the complexes, including individuals who presented evidence that the charges were spurious, and some who moved before the real estate acquisition even occurred. Tenants who lived through the acquisition spoke to the complexes’ increasingly deplorable conditions, including the proliferation of rats, mold, and leaks. All of this eventually led to a $3.25 million legal settlement on behalf of the tenants, and Kushner’s company eventually exited the deal.
Meanwhile, Blackstone has reportedly raised rents 12% across their portfolio during the pandemic, with apparent aspirations of charging up to 20% more across the board. In the single-family rental market, the rent for homes owned by private equity reportedly increased by 8% during the pandemic, which was 48% higher than the increase in the national average. So while real estate investments are enormously profitable for companies like Kushner’s and Blackstone—the latter has something to the tune of $585 billion in its current global real estate portfolio—it’s often less positive for tenants who see costs go up while losing what little accountability they may have had with more traditional landlords.
What this essay doesn’t delve into is how smaller landlords are now being squeezed out of the market as they cannot compete with the resources that private equity can deploy, especially when it comes to financing purchases of property and land to develop for property rentals.
Billionaire oligarch, thief, criminal, and possible murderer, Mikhail Khodorkovsky, needs no introduction to readers of this Substack. For those who do, just type in his surname into the search at the top of this page.
When Boris Berezovsky was found hanged in his bathroom in Berkshire, UK in March of 2013, a spot was opened up for a disgruntled anti-Putin oligarch to wage war against Moscow from aboard. Putin obliged by releasing Khodorkovsky from prison in December of that same year so that he could fill this role.
Since his release, Khodorkovsky has busied himself in places like Berlin and Zurich by funding anti-Russian NGOs, media concerns, and so on. He has also made himself available to western media on a frequent basis so as to push for stronger actions against Russia by the West.
In this recent interview with German publication Der Spiegel, Khodorkovsky insists that only force of arms can remove Putin from power:
Khodorkovsky: My appeal was not about supporting Prigozhin personally, but his rebellion, helping him to get to Moscow. I do not claim that Prigozhin is better than Putin, but he also isn’t any worse. The chaos and uncertainty during his mutiny could have been used to bring down the government and Putin. Putin and a large part of his entourage immediately fled Moscow. If the democratic forces in Russia had been better prepared, they could have taken power at that time. That’s what I had in mind.
DER SPIEGEL: You see the episode as a wasted opportunity for regime change?
Khodorkovsky: Yes, this mutiny presented not only a danger, but also an opportunity. That's exactly what I'm trying to convince my colleagues in the democratic opposition of right now. To my great regret, the rebellion ended quickly. But I believe there will be more events like this, and we need to make better use of them.
These so-called “democratic forces” simply do not have the ability to seize power in Moscow. They are far away from any centres of power, and are extremely distasteful to critics of Putin from the right.
Irresponsible:
Khodorkovsky: I don't mean that civilians should engage in combat with security forces. But in the event of a rebellion or in the event of Putin's death, we could end up in a situation where the military and security forces do not actively participate because they are distracted or unwilling. If 10,000 or 15,000 of the peaceful demonstrators were then prepared to take up simple weapons to occupy state buildings and communication centers, this could lead to success. It would be an uprising that would not have to result in any bloodshed at all, or very little.
The “need for a violent uprising”:
Khodorkovsky: At the moment, the most active group in Russia is the national-patriotic opposition, which was disappointed when Prigozhin broke off his mutiny. But there are also people in the democratic opposition who are thinking about how to achieve change. That is the group we are talking to. For these people, who have rejected violence for years, this realization is difficult: There is no other option but to take up arms.
DER SPIEGEL: Is there really nothing more that can be achieved through peaceful means in Russia?
Khodorkovsky: Peaceful demonstrations can achieve nothing under a regime that is prepared to shoot. Ten years ago, I would have answered differently. At the time, I assumed that if Putin knew he had a choice between shooting people or resigning, he would choose to resign. Provided he would get a guarantee that he would be let off without punishment. But since the annexation of Crimea, the fighting in the Donbas and, at the latest, after the beginning of the large-scale aggression, it became absolutely clear that for Putin, one human life, 100 human lives, 10,000 human lives mean nothing compared to his power. The tactics of the fight against him have changed accordingly.
DER SPIEGEL: Actions like the ones you are proposing would likely result in casualties. Some colleagues in the opposition have criticized you for this.
Khodorkovsky: This is what I say to them: Listen, are there no victims right now? The regime kills 1,000 people a day, Russians and Ukrainians. If another 100 people had to die in the streets of Moscow to topple this regime, I would feel very sorry for the victims, especially if I were among them myself. But it would still be an acceptable number of casualties to end this nightmare of a war.
The billionaire wants others to shed blood on his behalf so that he can return to Russia and loot what he failed to loot the first time around. A significant portion of the support for the conflict against Russia revolves these financial interests.
In the meantime, Khodorkovsky will continue to play Trotsky to Putin’s Stalin.
History will judge the current German coalition government as the worst in the postwar era. It has repeatedly shot itself in the foot, set itself on fire, and sacrificed what little self-respect it still had. Reduced to little more than a supplicant at the feet of the almighty USA, this government continues to pursue the same deadly policies that are ruining it.
One example of this is the recent unveiling of Germany's “China Strategy”. Although it has been somewhat watered-down from previous drafts, the final version “blasts China on human rights”, as if Berlin is a moral authority and Beijing not a vital trading partner for the Germans. The export-driven German economy depends quite a lot on the Chinese market, making this “strategy” befuddling to all but the most idealistic.
As it stands right now, Germany is helping arm Ukraine in its defense against Russia, it is also publicly shitting on a key trading partner, China, and is also de-industrializing at a rapid pace:
Germany’s biggest companies are ditching the fatherland.
Chemical giant BASF has been a pillar of German business for more than 150 years, underpinning the country’s industrial rise with a steady stream of innovation that helped make “Made in Germany” the envy of the world.
But its latest moonshot — a $10 billion investment in a state-of-the-art complex the company claims will be the gold standard for sustainable production — isn’t going up in Germany. Instead, it’s being erected 9,000 kilometers away in China.
Even as it chases the future in Asia, BASF, founded on the banks of the Rhine in 1865 as the Badische Anilin- & Sodafabrik, is scaling back in Germany. In February, the company announced the shutdown of a fertilizer plant in its hometown of Ludwigshafen and other facilities, which led to about 2,600 job cuts.
“We are increasingly worried about our home market,” BASF Chief Executive Martin Brudermüller told shareholders in April, noting that the company lost €130 million in Germany last year. “Profitability is no longer anywhere near where it should be.”
Malaise:
Confronted by a toxic cocktail of high energy costs, worker shortages and reams of red tape, many of Germany’s biggest companies — from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones — are experiencing a rude awakening and scrambling for greener pastures in North America and Asia.
Absent an unexpected turnaround, it’s hard to avoid the conclusion that Germany is headed for a much deeper economic decline.
As goes Germany, so goes Europe.
De-Industrialization:
New orders at the country’s engineering companies, long a bellwether for the health of Germany Inc., have been dropping like a stone, falling 10 percent in May alone, the eighth consecutive decline. Similar weakness is apparent across the German economy, from construction to chemicals.
Foreign interest in Germany as a place to invest is also receding. The number of new foreign investments in Germany fell in 2022 for the fifth year in a row, hitting the lowest point since 2013.
“One sometimes hears about ‘creeping deindustrialization — well, it’s not just creeping anymore,” said Hans-Jürgen Völz, chief economist at BVMW, an association that lobbies for Germany’s Mittelstand, the thousands of small- and medium-sized firms that form the backbone of the country’s economy.
Structural issues:
The country’s reliance on industry makes it particularly vulnerable. With the exception of software maker SAP, Germany’s tech sector is essentially non-existent. In the financial world, its biggest players are best known for making bad bets (Deutsche Bank) and scandal (Wirecard). Manufacturing accounts for about 27 percent of its economy, compared with 18 percent in the U.S.
A related problem is that Germany’s most important industrial segments — from chemicals to autos to machinery — are rooted in 19th-century technologies. While the country has thrived for decades by optimizing those wares, many of them are either becoming obsolete (the internal combustion engine) or simply too expensive to produce in Germany.
Take metals. In March, the company that owns Germany’s largest aluminum smelter, Uedesheimer Rheinwerk, said it would shutter the plant by the end of the year due to the high cost of energy.
Such reports would be less worrying if Germany had a strong history of economic diversification. Unfortunately, its track record on that front is patchy at best.
Germany pioneered modern solar panel technology, for example, to become the world’s largest producer in the early 2000s. After the Chinese copied the German designs and flooded the market with cheap alternatives, however, Germany’s solar-panel makers collapsed.
Germany managed to weather all of these factors thanks to cheap energy imports from Russia. The war and the destruction of Nordstream have crippled Germany’s ability to remain economically competitive on the global stage.
The danger to Europe:
The erosion of Germany’s industrial core will have a substantial impact on the rest of the European Union. Germany is not just Europe’s largest player; it also functions like the hub of a wheel, linking the region’s diverse economies as the largest trading partner and investor for many of them.
Over the past three decades, German industry has turned Central Europe into its factory floor. Porsche makes its top-selling Cayenne SUV in Slovakia, Audi has been churning out engines in Hungary since the early 1990s, and premium appliance-maker Miele makes washing machines in Poland.
Thousands of small- and medium-sized German firms, the so-called Mittelstand that forms the backbone of the country’s economy, are active in the region, producing mainly for the European market. While they won’t disappear overnight, a sustained decline in Germany would inevitably pull the rest of the region down with it.
“There’s a danger that Europe will end up being the loser in this shift,” Klaus Rosenfeld, the chief executive of Schaeffler, a car-parts maker, acknowledged recently, adding that his company was likely to build its next plants in the U.S.
The energy factor:
Compounding those demographic challenges are skyrocketing energy costs in the wake of Russia’s war on Ukraine, and Germany’s own efforts to combat climate change.
By halting deliveries of natural gas to Germany, the Kremlin effectively removed the linchpin of the country’s business model, which relied on easy access to cheap energy. Though wholesale gas prices have recently stabilized, they’re still roughly triple where they were before the crisis. That has left companies like BASF, whose main German operation alone consumed as much natural gas in 2021 as all of Switzerland, with no choice but to look for alternatives.
The country’s Green transformation, the so-called Energiewende, has only made matters worse. Just as it was losing access to Russian gas, the country switched off all nuclear power. And even after nearly a quarter century of subsidizing the expansion of renewable energy, Germany still doesn’t have nearly enough wind turbines and solar panels to sate demand — leaving Germans paying three times the international average for electricity.
Good work, Germany! Bomber Harris could only wish that he could be so destructive.
The OceanGate Tragedy resulted in quite a lot of mockery and politicking on social media, with various partisans riding their hobby horses atop of the remains of the submersible.
Henry Darlington instead chooses to put this disaster into a larger context: the human drive to explore the unknown, and why it is so vital to our existence:
Today explorers seek fame through increasingly gimmicky journeys which are valuable mainly for private and personal, rather than public, reasons. Yet there still remain true frontiers: above all the vast reaches of space. These frontiers require a different skillset than those of previous ages. Space and deep-sea exploration depend on careful calculations and programmatic planning. The ocean floor and deep space cannot be ‘brute-forced’ by funding sequential expeditions until one succeeds. A navigation error on a seafaring expedition might lead to a different island, or continent, but an off-course spacecraft will end only in an eternal void. The era of the swashbuckling, iron-willed adventurer has passed. In his place a new explorer archetype has arisen: the rogue-nerd.
***
One hundred and seventy-five years after Sir John’s death, nearly to the day, a crew of accomplished, yet pitifully under-prepared men undertook a new journey to one of these final frontiers. OceanGate’s Titan submersible was to journey over 3,800 meters to the bottom of the Atlantic Ocean to study and observe the wreck of the Titanic. Like the Franklin expedition, the Titan expedition relied on new technology, demonstrated clear negligence, and ended in the total annihilation of the crew. But this new exploration looked markedly different from Franklin’s.
OceanGate was founded in 2009 by Stockton Rush with the mission of exploring our oceans’ depths. While OceanGate advertised itself as an extreme expedition opportunity for the super-wealthy, they quietly supported NASA training missions, pursued private-public commercial ventures, and dreamed their submarines might eventually be used to explore the watery depths of Europa, underneath its thick crust of ice. By the time of its final descent, OceanGate’s third generation submersible, Titan, had completed fourteen successful, if occasionally troubled, dives.
The Titan was crewed by five men well-qualified to undertake such an expedition. However, just one hour and forty-five minutes into their journey Titan stopped communicating with its parent ship. As a captivated world imagined their oxygen dwindling in the dark and freezing cold, the crew’s plight became the focus of hot takes on Twitter from both the Left and the Right.
Darlington relays to us the joy that some on the left expressed at the death of a billionaire, while some on the right pointed to “diversity hires” as being a probable factor in the tragedy.
Audacity:
This type of criticism should sound familiar. In the past age of exploration, explorers were invariably ridiculed for being dirty, foolhardy and crazy. As Titan’s misfortune demonstrates, today’s generation of explorers, while characteristically different, cannot escape this contemptuous derision. For centuries, expeditions were funded by elite patrons who saw economic, cultural, and social value in projects that transcended ‘mere existence for the sake of existence’. Expeditions then as now were derided for their lack of preparedness and for their often strange and eccentric leaders. But this is an integral part of exploration. Expeditions by their very nature are haphazard, they don’t just fail occasionally, but usually.
The type of person who generates enormous economic and cultural output is naturally audacious and adventurous. Such a man or woman (or they) well understands the trade-off for undertaking daring endeavors. Titan’s passengers, which included two billionaires, were exceedingly wealthy. They could quite easily have used their funds to purchase an additional yacht, if not a golden ticket on Epstein’s jet. Instead, they patronized exploration and went so far as to join the expedition itself, a demonstration of the risk-adjacent mentality that is required for progress.
Value:
In spite of its seeming absurdity, the juice of exploration is worth the squeeze. Had the King and Queen of Spain determined to spend their gold on food for their subjects, rather than on funding a series of expensive expeditions to find more efficient trade routes, then America would not have been discovered and colonized when it was. Conversely, nations that withdrew from participating in the age of exploration condemned themselves to centuries of irrelevance. China, for example, had a brief flirtation with colonization prior to the European age of exploration when it funded Admiral Zheng He’s expeditions as far as the eastern coasts of Africa and Australia. Having set up a series of successful colonial trade outposts, the expeditions were inexplicably halted, and China resolved upon a policy of isolation. That policy condemned China to a steady economic and military decline, culminating in the ‘century of humiliation’.
The elites of early modern Europe recognized that risky exploration was necessary and essential. They supported explorers because the rewards were worth it. But contemporary society has largely forgotten the value of men who seek to go beyond at mortal peril.
I share this view as well. Our destiny is the stars.
We end this weekend’s Substack by continuing with the theme of exploration, specifically Asian sailors who sailed to the other side of the Pacific, beginning in the 16th century:
It is often forgotten that today’s western and southwestern states had once belonged to the Spanish Empire and then to independent Mexico until 1848. During the colonial period, they were part of the Viceroyalty of New Spain, ruled from the global hub of Mexico City. New Spanish territory extended not only into Central America and the Caribbean but also across the Pacific Ocean, and included such distant lands as the Mariana Islands, the Philippines and occasionally parts of present-day Indonesia, Taiwan and Cambodia. From 1565 to 1815, Spanish vessels sailed nearly every year between the ports of Cavite in the Philippines and Acapulco in Mexico to connect this vast expanse. They are known today as the Manila galleons, and it is through these ships that the first Asian populations (both free and enslaved) arrived in the Americas during the 16th century. They landed in Mexico in the thousands, and uncovering the details of their many lives is the quest of my forthcoming book, The First Asians in the Americas: A Transpacific History (2024).
………
In the search to find safe harbours to support the Manila galleons, the Spanish regime sponsored expeditions north from Mexico and east from Asia to chart the North American coast. Through these voyages, the first Asians made landfall on what is now the US west coast in 1587. Departing the Portuguese enclave of Macau, the Nuestra Señora de Buena Esperanza under Pedro de Unamuno searched unsuccessfully for mythical islands of gold and silver in the Pacific before stumbling upon California’s Morro Bay on its way south to Acapulco. There, Unamuno unloaded a contingent of soldiers and priests – the typical colonial duet – to contact the region’s Native population.
Eight Indigenous men from the island of Luzon in the Philippines served as auxiliaries and ‘spies’ in the landing party under the twisted logic that people misnamed ‘indios’ (Indians) from one land would be useful intermediaries with equally misnamed ‘indios’ from another. Misunderstood from the beginning, nearly 450 years ago, the gross conflation of ethnolinguistic groups remains a familiar theme for people of Asian descent living in the Americas today.
A politicized essay, but well-worth reading for the historical bits. Click here to read the rest.
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I know, I know....I haven't been around. I apologize, but sometimes real life interferes with the online one.
Rulers and people of influence and authority have no real ideology other than their own power, increasing their power and consolidating it.
This is by its nature a zero-sum no-holds-barred winner-takes-all game.