THE RENTAL ECONOMY IS AT RISK IN A DOWNTURN / THE WALL STREET JOURNAL

The Rental Economy Is at Risk in a Downturn

Businesses that rely on renting homes, leasing cars, and streaming music or movies are largely untested in a recession

By Justin Lahart


llustration: Sam Island 


Americans don’t own stuff like they used to.

Fewer of them own the homes they live in than in the past, opting to rent instead. A growing share have opted to lease the car they drive—if they drive at all—rather than hold the car’s title. And it seems only aficionados own DVDs or music recordings instead of a streaming subscription.

The shift away from ownership to what KKR’sPaula Campbell Robertshas called the asset-light consumer represents a reshaping of the economy, borne of a confluence of factors, including the scars left by the 2008 financial crisis and the advent of new technologies. It is giving households increased flexibility in how they finance their lives, lowering the debt burden that often comes with ownership.

Investors are loving the rental economy too, paying up for businesses with steady cash flows. But the asset-light consumer’s behavior remains largely untested in a downturn—a rising risk—and could hold nasty surprises.

The homeownership rate—the share of U.S. households that own the home they live in—peaked at about 69% in 2004 and fell during the financial crisis. It never recovered, now standing at about 64%, or about six million fewer owned homes than at the peak.

That shift to rentals represents big income streams. Investors such as Blackstone Group bought up heavily discounted homes following the financial crisis, turning single-family rentals into a big business. Just two companies, Invitation Homes, which Blackstone helped bankroll, and rival American Homes 4 Rent own 133,000 homes combined.

One reason more people are renting may be that, after the financial crisis, homes aren’t seen as such a safe investment. In an economic downturn it can be easier for renters to lower their housing costs by moving into a lower-rent home or to move for job opportunities elsewhere. Homeowners, stuck with mortgage payments, have it harder.

That flexibility comes at the cost of not building up home equity, which can help create wealth and provide a financial cushion in an emergency. But it also means the new crop of landlords faces their own risks. Following recessions, rents can stagnate or even fall, while the number of vacant rental units often rises. Investors in rental properties may not have accounted for lean times. 


One might point them to the auto-leasing market for clues about what can go wrong, but that industry also seems to have forgotten the lessons of the last recession. Leasing deals have doubled to 32% of new vehicle purchases over the past 15 years, according to Edmunds.com.

Leases come with lower upfront costs and typically require lower monthly payments than car loans. They benefit car companies too, offering a steady income stream and a stable supply of used cars.


As with homeownership, flexibility comes at a cost. The car owner has an asset after paying off loans while the lessee doesn’t. But the average lease length is about half the average length of a car loan. In a downturn, lessees can more easily lower their car-payment costs and avoid the losses associated with selling a used car into a down market. The company financing the lease could be left on the hook. In 2008 a glut of cars came off lease and had to be sold at deep discounts, causing sharp losses.

Lately younger people in particular have eschewed personal vehicles altogether. That is a boon to companies such as Uber and Lyft. How will the nascent ride-hailing industry fare in a recession, though? Nobody knows.




Entertainment is increasingly rented too.

Last year, consumer spending on services that stream and rent video and audio came to $28.2 billion, according to the Commerce Department, which compares with $9.8 billion a decade earlier. Over that same period, spending on recording media, like CDs and DVDs, slipped to $16.2 billion from $25.8 billion. As with other rent-like services, streaming provides the steady income that investors love— Netflix briefly surpassed the value of Walt Disney this year—but is also something that consumers can cut back on.

Will they? Netflix’s streaming efforts didn’t even start until 2007, right before the last recession. Now it is a much bigger company financed by billions in junk bonds.

It isn’t alone.

JPMorgan Chasecalculates that the corporate-debt-to-income rate for the domestic nonfinancial corporate sector now exceeds the level before the last recession. Household debt remains a concern, but debt-to-income levels are down sharply from where they were before the rental revolution.

If times get tough, how many companies will find that the rental checks they were counting on aren’t in the mail?