Let’s keep it brief. Stick with me.
You know how perfect diversification means that one bears no idiosyncratic risk? That means that one is willing to pay more for some given return, driving up the price of assets included in such a diversified portfolio. That means that, without an informational advantage, index funds should place upward pressure on the price of assets that compose them. Anyone who invests in individual stocks, again without an informational advantage, would be priced out of the market because they bear idiosyncratic risk and would need to enjoy a risk premium that lowers the maximum price that they are willing to pay.
What about real estate?
A similar case can be made for corporate landlords who diversify their holdings geographically. In this case, they bear systematic risk and sectoral risk. With enough properties, they have diversified away their other idiosyncratic risk. That means that they are willing to accept a lower risk premium for each property and pay a higher price. Takeaway: if corporate landlords enter a local real estate market, then they place upward pressure on the price of real estate. They don’t just constitute greater demand by being more demanders. They, in fact, are willing to pay more than occupier owners and local landlords who are not diversified in their real estate exposure.
Higher home prices sound bad if you want to buy one. But what about rents? After all, lower income people tend not to own a home. Counterintuitively, if the market for real estate includes competition, then another way that lower returns for diversified corporate landlords could occur is due to charging *lower* rent. Competition in the real estate market is what pushed real estate prices up. And competition in the rental market is what pushes rents down. This is obvious once you consider the standard Net Present Value calculation. A lower return can occur due to paying a higher price now, or accepting lower cashflows in the future.
Bottom line: Diversified corporate investors increase a local market’s real estate prices and decrease the rents in the presence of competitive forces. Please tell me what you think in the comments.
(Yes I am aware of the apparent recent collusion between corporate landlords that increased rental rates.)
Economist Writing Every Day 
The dynamics depend a lot on whether regulations allow new construction in the area.
If the housing stock is approximately fixed, ie the supply curve is vertical, then it doesn’t matter who owns the houses. Demand will determine the price.
If new houses can be build, then you are right that a cheaper source of capital, like index funds, can make the lives of renters easier in the long run.
Kevin Erdmann has lots of good pieces on his blog about how the misguided reaction to the global financial crisis surpressed house prices and thus also new construction, and how that made rents skyrocket.
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PS Kevin Erdmann also predicts that the coming populist backlash against corporate landlords will lead to higher rents. Exactly because of the mechanism you describe here, just in reverse.
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Thanks. While regulation clearly affects prices, the mechanism that I identify doesn’t require high or low regulation – just different required market risk premia among demanders and some market competition.
You say that demand will determine housing prices with vertical supply – yes! My point is that the demands between diversified investors and undiversified demanders are different. So, building new houses – while super important – doesn’t affect the logic.
Kevin Erdmann is no dunce, I’ll have to read more – thanks!
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See eg https://www.discoursemagazine.com/p/flirting-with-the-last-no-in-housing
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I won’t try to argue with the principles discussed in this post, but just add an anecdotal observation, that a common practice in the real estate business, a practice I would expect to be systematically followed by corporate landlords, is to buy a shabby looking rental property from the sleepy local landlord, make some cosmetic improvements, and promptly raise the rents. Blackstone is not in this biz to keep rents low.
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Absolutely!
Blackstone pursues profit. And they increase the supply of the higher quality rental units, putting downward pressure on that type of units. Undoubtedly they reallocate rental units to a higher value quality in the quality distribution.
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