“Big Apple’s” Effect on Charlotte Rental Prices: Anti-Trust or New Market Reality?

You are an apple farmer- a good one!  You know your soil, got the regular watering down, and are complimented often for how crisp and tasty your apples are.  You write a pretty good blog about them too.

 

On the business side, you price your apples the way your father did.  You factor in all your costs and then add your 50% mark-up; it usually comes out around $1.00/pound.  Your competitors are usually around that price as well.

 

But a new apple farmer, Big Apple, has come into town.  They have a lot of investment capital and are buying up apple fields everywhere.  They pay a good price for these fields; so many apple farmers have sold to them and looked for better pasture elsewhere.  Big Apple’s presence in the apple market hasn’t upset the cart because the public seems to have an insatiable appetite for apples.  And, truthfully, Big Apple can grow apples with the best of them- tasty stuff!

 

But they do things a bit differently on the business side.  They price their apples for $2.00/pound.  They can afford longer sales times and just wait for other apple farmers to run out of their apples.  They also extend credit to people who have not paid for apples in the past.  There is nothing shady going on; they don’t talk to other farmers about their pricing.  They just price at $2.00 and wait for an inevitable sale from a hungry public.

 

After some time goes on, you start to wonder why you can’t charge $2.00/pound for your apples too.  You’re not that brazen, so you start at $1.25/pound and then go up to $1.50/pound.  Other farmers independently follow suit.  Apple prices begin to go up and sales are impacted less and less (people like their apple fritters!).  It is now the “new normal” and it is understood that apples cost around $2.00/pound. 

 

That is true until Big Apple decides that $2.50/pound is the new price.  Other farmers like where this is headed.  Big Apple keeps buying up fields at higher prices knowing they can just sell their apples for more.  Their investors cheer.  Other farmers (quietly) cheer as well.

 

The public can’t understand why apple prices keep going up and grumble to the local government.  The public realistically can’t keep buying apples at higher and higher prices!  But they need to eat and don’t have much choice.  The government tries to find some impropriety to call Big Apple on, but their business practices seem to be completely legal; it is the free market system at work.

 

So the government looks at other venues to make apples more affordable, especially for families that can’t afford them anymore.  They ask for tax dollars in bond offerings, try to buy fields of their own to sell their own, and ask corporations to assist charitably as well.  Though their intentions are noble, their methods will probably produce two unwelcome, unintended consequences:

 

1. An unsustainable business model to buy higher and higher priced fields to produce $1.00/pound apples when Big Apple (and other farmers) are buying fields sustained at $3.00/pound revenue
2. Subsidizing Big Apple’s (and other farmer’s) business models of higher and higher apple prices

 

So what is the answer to combat high apple prices?

 

This fictitious apple example is happening right now in the Charlotte market with rental housing.  The rental houses are “apples”, “Big Apple” is the big investment groups that have been buying up Charlotte homes and turning them into rentals for almost a decade, and the “other farmers” are landlords (and property managers, like me) who set rental pricing.

 

There is no anti-trust gamut going on that I can see.  As a property manager in Charlotte, our job (and duty) is to charge as much rent from our client’s properties as we can while mitigating risk.  And we don’t need to talk to anyone else to see what other properties are renting for; we have access to this information through the market and the Multiple Listing Service (MLS).  When other properties are priced higher and are rented, it does set the market to a new high (sort of like for NBA or NFL players whose contracts always seem to climb higher every year).

 

On the same token, I’ve been shocked to see formerly $700.00/month rental homes now going for $1,200.00/month.  I can understand why the public, whose wage growth has not been close to keeping pace with the rental increases (especially at the lower income levels), would be concerned.  I’m in the rental business; I communicate with tenants everyday.  It’s tough from their end and seems to be a new market reality that is going unabated.

 

I’d argue we are squarely in anti-trust territory without any illegal anti-trust activity (as presently defined).  It’s a great environment to sell apples in Charlotte, but not a great time to have to buy them.

 

Happy Landlording!