The first time I went to London I was charmed by the many railroad arches. Many of the city’s tracks are elevated a story off the ground on brick viaducts that are punched through with arches, some to allow roads and streets to run underneath, but some to create storage and interior spaces. You can see what I mean in the below picture.
These arches have always been leased for light industrial and storage uses, and many of them still are today, but as industry faded from the capital, a wonderful diversity of businesses sprung up. From restaurants.
To climbing gyms
To theatres
These are challenging spaces, windowless on most sides, with trains rumbling overhead. But this also made the spaces historically cheap, and it’s not surprising that many legacy arch businesses have a strong DIY or alternative bent. So I was surprised to learn that private equity giant Blackstone Group now owns the majority of railway arches in the city after a massive sale. Network Rail, the public authority created in the 90’s to own and operate the UK’s rail infrastructure, inherited the arches from the various railroads that built them. Network Rail’s primary concern is the operation of trains, so a portfolio of commercial spaces was never a priority. This lack of concern made Network Rail an imperfect, but usefully distracted landlord. As a public body, there was never a major profit motive, and the company seemed happy to make some steady income and have people maintain the space below their tracks. This all changed in 2018 when Network Rail sold almost its entire portfolio of arches for 1.5 billion dollars to Blackstone and Telereal Trillium. In a joint partnership, these two set up the Arch Company to manage and lease the spaces. Instantly on its creation, the Arch Company became the largest small business landlord in the UK. This saga is a useful case study of how ownership structure is an overlooked component of city life.
Most of you reading this are probably renters. Maybe you’ve had a few landlords throughout your life. Maybe you’re like my friend Nick (of bar list fame), and your landlord is a chain-smoking Italian-American who lives on the ground floor of your building with his mom and tunes his vintage Vespa in the back. You may have to run down and fix his computer now and then, and sometimes he asks for the rent in cash, but you also pay below market rate because he likes you. Maybe you’re like my other friend, and your landlord is some management company that you deal with strictly through email, and who regularly raises the rent because they can. Maybe you’re like my Grandfather who lived in a rent-controlled apartment, or you’re like half a million NYC’ers and your landlord is the state authority NYCHA meaning your rent is low but you wait forever for basic repairs. The point is that the experience of living in a place is shaped immensely by who or what owns it and how much they care about one thing: making money.
We are so indoctrinated with the idea that buildings are profitable and land is a commodity that we often fail to grasp the idea’s impact or imagine alternatives. Private property has existed since ancient times. Plato argued in Republic that collectively owned property would promote the pursuit of common interests. Aristotle argued that individual ownership would promote a greater sense of responsibility as everyone would have to look out for their own interest. We are still having this debate today. The concept of property as we know it grew from Enlightenment thinkers in the 1700’s. Smarter people than me can shed light on this history, but a key concept emerged from the writings of John Locke. Locke believed that God gave the Earth to all people in common, yet he argued that people had a right to own their labor, and using that labor to improve or wring benefits from land conferred ownership: “he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property.” This idea is the foundation of a lot of our understanding of how property works. God may have given the Earth to everyone, but by stewarding it, planting it, building on it, etc, you can own it.
You may imagine a landowner as a rich individual, family, or company. But the largest landowners have generally not been private individuals or companies but institutions and states. The Catholic Church owns 177 million acres of land worldwide. The US Federal government owns 620 million acres of land. This dynamic plays out at the local level for many cities. The biggest private landlord in New York City isn’t the Rockefellers, a bank, or one of our dozens of multinational real estate corporations, it’s Columbia University with holdings approaching 4 billion dollars in value, holdings that still pale in comparison to the holdings of the City government itself.
Given the historical sense of stewardship as, at least partially, the basis of ownership, and the historical positions of governments and institutions as the largest landowners, it is striking how much urban property has shifted into the hands of private equity firms like Blackstone. Blackstone doesn’t make anything (except money), it doesn’t build buildings or administer them, it is purely an owner. As a landlord, it is infinitely more sophisticated than any mom-and-pop. An individual landlord may rent based on what they believe local people will pay. They may not even care about maximizing profits. Private equity firms use analytics and their vast legal departments to seize opportunities other landlords may miss. With shareholders to please, they also don’t leave a cent on the table. In New York, private equity firms were some of the first to see the opportunity to buy rent-controlled property in the wake of the 2008 recession. These properties traditionally made meager returns because rent was legally low, but sophisticated landlords soon realized they could convert units to market rate using a combo of legal tactics as well as blatant harassment to get rent-controlled tenants out. A Blackstone subsidiary began using software to hit renters with $100 fees for being even one minute late on rent. These tactics are fairly straightforward compared to the financial tools created to wring value from their portfolios. An endless web of shell companies and subsidiaries owns and administers the buildings, which are often collected into REITs (real estate investment trusts) and floated on the stock market. Individual people or corporate investors can buy shares of a property bundle as they would for Microsoft, meaning your apartment building may have shareholders spread around the world. The performance of the REIT depends on the income it produces through rents and leases, so there is always an incentive to charge more. City buildings are increasingly seen as an asset class to be traded and divided infinitely, and healthy returns are expected. And it’s not just private companies, sovereign wealth— the state-owned funds of countries like Saudi Arabia and Qatar- and even public bodies like pension funds are increasingly playing the property investment game. Cities have been thoroughly commodified and financialized in a way that would look extreme even 50 years ago.
What are the alternatives? There is the simple developer, who may generate the funds needed to build or buy a building and then flip it or rent it to recoup their investment and then some. There are, believe it or not, non-profit developers like Phipps Houses, and housing associations that lack a profit-making motive entirely, seeking to make only as much as they need to build and operate a space. Then there is good old-fashioned government ownership, where essential buildings — generally housing— are heavily subsidized. In some cities like Vienna, the volume of government-owned housing is so high that it’s the norm to live in, and even private housing is affordable since it must compete with the huge public housing stock. Beyond housing, land used for the common good, roads, parks, etc is often publically owned. Some countries take this idea to more extreme lengths. In Paris, the municipal government owns something like 20% of all the city’s storefronts. The City maintains the balance of essential shops and prioritizes renting to local and neighborhood businesses over chains and international brands. They also rent to community centers, bookshops, bike repair shops, and other culturally or socially impactful businesses.
In the US, anything involving expanded state ownership is usually a non-starter, so individual people and groups have developed alternatives based on mutualism. Community land trusts (CLTs) are one model. CLTs have their roots in rural cooperatives of Black farmers who struggled to acquire farmland in the segregated South. Land was pooled and held in a mutual trust overseen by a council of farmers who coordinated the purchase of new lands and the building of essential agricultural facilities for collective use. Individual farmers retained ownership of what they produced and were entitled to the value of what they built on the land, but the land itself belonged to the CLT. This idea eventually spread to urban places, and today there are over 200 CLT’s in the US. The models vary slightly, but the basics are similar. Acquire land, remove it from the speculative market, and lease it at low cost, usually to create affordable housing.
I did a little experiment and asked three friends if they’d ever heard of a CLT and not one of them had. After explaining it a couple of times to one of them, he responded in mild disbelief, “So basically… they just don’t want to make money off the land?” Why is it so difficult to imagine we can build new things and maintain them without a profit motive? What would be possible if we didn’t expect to make money from everything? Increasingly this is an expectation I hear more and more in the mainstream. Libraries and public transit systems lose money, so they’re somehow broken. Never mind that these things are supposed to lose money. We pay for them because they enrich our regions and expand what’s possible for the people who live in them. The value they create is captured elsewhere.
Private equity would argue they are investing in real estate at a time when the government and the building sector are struggling to keep up with demand. To many, the profit motive ensures a steady stream of high-quality and well-kept spaces. But for who and to what end? A block of three railroad arches by my old flat in Brixton are empty. These arches sit adjacent to Brixton Village and Market, a bustling hub of Carribean grocers, Halal butchers, and local restaurants, an empty patch in a sea of color and activity. The Arch Company has whitewashed the interiors and spruced up the facades but is charging well above the rates for, say, a stall in Brixton Market. Elsewhere, the Company has raised rents on arch tenants as much as 50% in “up-and-coming” neighborhoods. Few in Brixton today could afford what they’re charging, but no matter. I’m sure their analytics have shown them that the neighborhood is gentrifying and property values are going up and up. With these trends, it’s more profitable to wait for change than to cater to the neighborhood as it exists today. Eventually, someone will come along who can pay what they’re asking, and as the subsidiary of a fantastically rich company, they can afford to wait.
So filled with enlightening information, from such a global perspective--thank you! And re: that grandfather who lived in a rent-controlled apartment--the landlord couldn't wait for him to die, to get in there, renovate . . . and quadruple the rent.
Ugh. That is all.