Wall Street Expands its Reach: Farming, Rental Markets at Risk
Wall Street is expanding its reach. In the years since the financial crisis, recovering markets and a flood of easy money from the Federal Reserve have encouraged large institutional investors to move into whole new sectors such as rental homes and farmland. Unfortunately, small farmers and homeowners are losing control of their futures while the well-funded newcomers capitalize on their latest opportunity. By introducing profit-maximizing corporate management in these areas, we may see higher prices for food and rent before long. How is Big Money able to boldly expand so soon after what seemed to be a very humbling experience just a few years ago? And what role might sustainable and responsible investors have in responding to this situation?
This story has its roots in the financial crisis of 2007-9, when asset prices were driven down in a historic panic, leaving large banks crippled. The ensuing recession devastated many peoples’ incomes, leaving homeowners unable to pay their mortgages and triggering a wave of foreclosures. The Federal government and the US central bank, the Federal Reserve, came to the rescue of the banks, bailing them out with taxpayer money and offering virtually unlimited lines of credit. Homeowners, on the other hand, did not receive such benefits, and foreclosures largely had to work their way through the system. As a result, banks and other large investors were able to bounce back aggressively, while five to six years later, the majority of people in the country are still struggling economically.
For financial institutions, two main motives drive nearly every decision: making profits and controlling risk. Investing in farmland and rental homes do both. In recent years, armed with copious cash, banks, endowments, pension funds, insurance companies, and hedge funds aimed to identify investments with beaten-down values that featured attractive cash flow and potential upside. They also desired diversification away from traditional investments to lower the risk of another serious financial meltdown. Finally, any new investment areas had to be big enough to absorb the large multibillion-dollar amounts that these institutions work with.
In farmland, there is a major generational shift happening, as longtime farmers age and the younger generation is not so interested in taking the reins. About half of all US farmland is expected to change hands within the next twenty years. Consider how the ability of a new generation of young farmers to acquire and finance farmland stacks up against the ability of large institutions to top any bid and pay cash for the best properties, and you can understand how big of a deal this really is, potentially for decades to come. To top it off, the new institutional owners are apparently quite savvy about what to grow, selecting the most profitable crops to meet growing demand for meat, nuts, and other gourmet foods in emerging Asian markets, presumably leaving the more risky, lower margin crops to small farmers.
Fortunately, responsible investors have the means to make their own positive impact on American farming. Sustainable farmland funds are buying conventional farmland and converting it to organic, while offering young farmers fair lease rates and “lease to own” opportunities, so they can eventually own their own land and destiny. Local investing groups such as Slow Money chapters around the country encourage individuals to invest throughout their local food production systems, or foodsheds. Even acts as simple as buying at a local farmers market or signing up for a Community Supported Agriculture (CSA) share of fresh, seasonal food offered by a local farmer can support small farmers against the rising tide of big money seeking prime farmland.
In the rental home market, institutional investors are snapping up homes in bulk by the thousands. Early evidence shows that they are targeting lower- to middle-income neighborhoods where their opportunities are greater and there is less competition. According to one analysis, in the last two years, these investors have captured an estimated $88 billion of gains in home value that would have otherwise gone to the previous owners, had they not sold or been foreclosed on. Furthermore, according to several reports, they are proving to be fairly unresponsive landlords, as the needs of individual renters are getting lost in the shuffle, leading to more tragic outcomes.
Here, responsible investors can contribute to potential solutions by investing in mutual funds that finance mortgages for low-and moderate-income borrowers, affordable rental units, and community development loans. These funds support homeownership in the many of the same struggling neighborhoods that institutional investors are targeting for their schemes. People can also move their money from large Wall Street banks to local banks and credit unions that support their communities with friendly, not predatory, lending.
Though the solutions may seem small, and the effect of a single investor even smaller, if we expand the number of people that are aware of these issues and invest in solutions, we can create a force greater than all the institutional money put together. We must not forget that institutional money, as often as not, is our money. Giant pension funds are investing the retirements of our friends, families, and neighbors. Insurance companies are investing our premiums, banks are investing our deposits, and endowments are investing for the education of our youth. These institutions are ultimately responsible to their shareholders and stakeholders, which means that lobbying and direct advocacy, especially when done as part of coordinated campaigns, can get real results. Natural Investments, and many of the mutual funds that our clients invest in, actively engage in such campaigns to hold investing institutions responsible for their policies and behavior. Please do your part to spread the word, and hopefully, together, we can bring about better long-term outcomes for our communities, small businesses, and small farms.
This article first appeared in the Spring 2014 edition of the Natural Investment News