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Michael Ho Wai Lee/SOPA Images/Sipa USA via AP
A banner hangs at the gate of the University of California, Berkeley, during a demonstration last November.
At the beginning of the year, the University of California (UC) delivered a windfall to Blackstone’s real estate trust (BREIT), at a time when the fund faced a wave of redemptions from investors. The investment arm of the university system first poured over $4 billion into the fund, and then doubled down recently with another $500 million. The university’s unions oppose the deal on the grounds that corporate landlords such as Blackstone inflame California’s housing crisis by driving up rents and eviction rates. Union leaders have announced upcoming actions to urge the university to divest from Blackstone.
The clash raises further questions about whether public institutions with taxpayer funds should be aiding and abetting the private equity business model, which often entails cost-cutting, job layoffs, and bankruptcies.
Along with other institutional investors, Blackstone—the world’s largest private equity firm—has made a huge bet on housing since the Great Recession, buying up properties around the country and splitting the profits among shareholders through a financial structure known as a real estate investment trust (REIT). The corporatization of landlords has come under fire for incentivizing evictions and rent increases almost twice as high as the national average. In many documented cases, REIT properties also create miserable living conditions for tenants in the hopes of pushing them out to upsell.
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Recently though, REITs faced setbacks. With property values dropping, enough investors fled Blackstone’s BREIT that the firm restricted withdrawals. That didn’t dissuade UC from pursuing a strategic venture, one that Blackstone’s head of real estate Nadeem Meghji described as “changing the narrative” around the fund.
Though UC Investments was able to extract concessions from Blackstone—mainly that a billion dollars of the firm’s own BREIT shares will go into the venture—the endowment will be locked in for six years. If housing markets in California collapse over that time frame, a phenomenon not without precedent in the 21st century, the university will have significant exposure.
The UC system is following the model set out by private university endowments that have increasingly stacked their portfolios with venture capital and private equity investments.
Since the Federal Reserve’s interest rate hikes, private equity firms have slumped, with many funds not delivering the high returns investors had grown accustomed to. That’s pushed many PE funds such as Blackstone into buying insurance annuities and other riskier plays such as selling their own companies to themselves. These recent practices have led some Wall Street insiders and PE managers themselves to call the business model a “Ponzi scheme.”
Despite the market downturn, Blackstone’s CEO Steve Schwarzman, a former Trump adviser, took in a record $1.2 billion in base pay and dividends, higher than most heads of Wall Street banks. Blackstone was also embroiled in a recent child labor scandal after a sanitation company it owns paid $1.5 million in fines to the Department of Labor for employing over a hundred child workers at meatpacking plants across the country.
Upon the announcement in January of its BREIT investment, UC faced immediate backlash from its unions, fresh off a graduate student strike in December. The high cost of housing was featured prominently as an organizing principle for the union’s increased pay demands. Even after winning a 46 percent pay increase, a number of graduate workers living in the most expensive cities in the state will still hand over upwards of 40 percent of their earnings in rent each month. Many have to pick up second jobs to make rent, while others get priced out entirely and are forced to sleep in vans. Across the state, almost a third of Californians’ income goes to housing costs, which tend to be even higher for residents close to university towns.
The university is both the largest employer and landlord in the state, and has pledged to ensure housing affordability.
During contract negotiations this past winter, UC administrators tried to use housing prices as a bargaining chip. UC Labor Relations Director Letitia Silas warned that raising wages for academic workers could have “unintended consequences” by “subsidizing private landlords and further exacerbating rental costs for other Californians.”
Now, union members are holding up those comments to show that the university’s private equity investment conflicts with its own supposed priorities. In an essay written by three UC professors on the blog Law and Political Economy Project, the authors write: “At the same time as they were attempting to shame graduate workers into accepting lower wages, they were busy devising an investment partnership with one of the largest private landlords in the US.”
The university is both the largest employer and landlord in the state, and has pledged to ensure housing affordability. The unions for graduate students, academic workers, and other university staff have blasted the Blackstone deal as contradicting UC’s stated goals. They argue it will exacerbate housing unaffordability in the state by entrenching private equity’s grip on the housing market.
“As one of the largest landlords in California, the University of California already bears significant responsibility for this crisis. However, through this new partnership with Blackstone Inc., the University will become a major driver of this affordability crisis for the UC community and the rest of California,” read an open letter signed by all the major unions to Chief Investment Officer Jagdeep Singh Bachher.
Though Blackstone has expanded across the country, its footprint has especially taken hold in California, where it began buying up cheap properties in the wake of the housing market crash, on its own and through its onetime rental housing arm Invitation Homes.
In California’s already hot housing market, the rise of institutional investors has led to further overpricing. Though Blackstone claims its effect on the national market is grossly exaggerated, the firm holds substantial sway over certain cities in California like Sacramento, where it’s the largest landlord. Sacramento rents increased by 19.5 percent in 2021, the fifth-largest swing for any city in the country that year.
Sacramento epitomizes the Blackstone formula: By buying up distressed and devalued properties, the firm can limit housing supply and use market power to raise rental prices. As Blackstone President Jonathan Gray put it in a Bloomberg interview about the UC deal: “Less [housing] supply is key.”
As UC struck the deal, Blackstone tenants protested in San Diego, Los Angeles, and San Francisco over increased evictions and decaying building infrastructure without repairs.
At a UC Board of Regents meeting in January, one tenant in San Diego told the committee that after the building was bought by Blackstone, rents rose 8 to 9 percent year after year. Rents had been increasing under the previous landlord but at a lower rate. Blackstone also refused to do regular maintenance, leading to co*ckroach infestation.
The deal isn’t the first time UC has gotten in bed with Blackstone’s real estate arm. Several UC campuses, most prominently UC Irvine, outsource portions of their student housing to American Campus Communities, which Blackstone bought in August for $13 billion.
In a statement to the Prospect, Rep. Katie Porter (D-CA), who represents the Irvine district, responded to the recent UC venture with Blackstone. “While Californians struggle with the high cost of housing, private equity firms like Blackstone have exploited this ongoing crisis to pad their profits at the expense of students, workers, and families,” Porter said. “We need all levels of government to step up and do more to stop Wall Street landlords.”
At the same time as the university put billions into Blackstone, workers at a handful of campuses have reported ongoing threats of potential layoffs by administrators, going back on a promise the university made during the grad worker strike. Students at several university libraries such as at Berkeley are also seeing notices about reduced hours and services because of budget cuts.
State budget cuts for education in California have consistently outpaced cuts for other state programs. Those austerity measures are largely the reason why the university system now relies heavily on the returns from endowment investments in private equity, just like private universities.
The unions have openly called for the school to divest from Blackstone and told the Prospect they plan to organize several upcoming actions to put pressure on the university’s administration.
“UC should focus on delivering excellent research and education instead of profiting off real estate. In the meantime, UAW 2865 and UAW 5810 will be working with other UC unions to push UC to divest its holdings in companies that exacerbate the housing crisis Californians face,” said a representative for United Academic Workers 2865.
Luke Goldstein
Luke Goldstein is a writing fellow at The American Prospect.
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