Rent Control Becomes a National Movement

Posted In — Market Research | Trend Article

Tighter controls on apartment rent increases are emerging on the national stage. Already rent control or caps have been instituted in California, Oregon, and New York City. Serious attempts to expand these same efforts are underway across the U.S., which will affect a majority of the national multifamily housing stock and is already impacting cap rates.

The rent control measures that have been enacted are being closely watched by other states too, and as a result, have captured the attention of politicians. Many legislators are pushing for similar rules that have been endorsed by three of the top four presidential candidates.

National Multifamily Housing Council’s Jim Lapides says this national movement toward tighter rent control is here to stay, however misguided it may seem. “Unfortunately, I think we’re going to continue seeing it around the country for the foreseeable future,” he said.

To that point, California Governor Gavin Newsom said at a press conference last month when he signed AB 1482, the statewide rent control legislation, “This is a profoundly important moment. The fact that we are leading the nation in trying to meet this moment is a point of pride, and it is a point of principle that we need to continue this kind of energy to focus on increasing that supply.”

Newsom predicted other states would follow California’s lead. “We created the capacity of belief; now we know this can be done. You’re going to see this happing in states all across the country, not just one or two states,” he said. “There’s no doubt in my mind this is a movement afoot all across this country. It may be most acute in California, but is not unique, this affordability crisis in our nation.”

California’s AB 1482 caps annual rent increases at 5% plus the rate of inflation — currently about 8% — for much of the state’s multifamily housing stock. The bill also includes “just cause” eviction policies to qualified California housing. The bill’s rent cap will mainly affect properties that are 15 years of age or older, contain two units or more, and are not already subject to local rent control ordinances. The legislation, however, will not interfere with local rent control laws, which remain under the purview of the Costa-Hawkins Rental Housing Act. The legislation also doesn’t apply to single-family homes, townhouses, and condos, except when owned by corporations or REITs. It also will exempt duplexes when one unit is occupied by the owner. A retroactive provision in the bill will require a landlord who raised the rent after March 15, 2019, by more than the new law allows, to reset the rent back to within the range of the bill’s provisions at the start of 2020.

Oregon’s new rent control law (Senate Bill 608), passed earlier this year, caps rent increases at 7% plus the rate of inflation for the urban West, which works out to a 9.9% rate through 2020 under current conditions. Buildings less than 15 years old are exempt from the cap, which Oregon lawmakers hope will keep the development pipeline full with new projects. The law doesn’t apply to government-subsidized rents, and the cap wouldn’t apply if a tenant vacates a unit on their own.

Part of what is driving the move toward tighter rent controls is a direct effort to address the high cost of housing. Many hope the passing of California’s AB 1482 rent control legislation will take some of the wind out of the sails of those pushing for tighter controls as a way to make housing more affordable in the Golden State. Yet, it may actually have the exact opposite effect.

Many economists and CRE experts believe rent control does little to make housing more affordable, and likely will make it more costly for future renters. That’s because rent control acts to remove units from the market and locks in rents at artificial levels.
Ultimately, that results in driving up rents for the remaining available units.

There are some who believe the California rent control bill will have minimal impact for owners and investors since rents don’t normally increase above the level of the new law’s cap. Another reason is that experienced apartment investors typically closely monitor improving market fundamentals and increase rents accordingly at their assets. A fear for owners who haven’t been keeping pace with regular rent increases at their properties as the market improved is they will own an asset locked-in at below-market rates.

Tighter rent controls don’t encourage property owners to invest in asset improvements. They may cause investors to steer clear of properties under strict rent controls, especially if other investment options are available to them. That is likely to cause investors to pause until they figure out the new rules, especially on value-add plays. New supply won’t arrive soon either since rent control measures do little to encourage developers to build.

Experts believe the housing affordability crisis can’t be solved via rent control either. Many think the path to producing more housing stock can be paved with a combination of eased restrictions, lower impact fees, and a more expedited permitting process.

California Apartment Association (CAA) CEO Tom Bannon noted the rent control measure passed addressed tenant protections and rent gouging. He says, “Now, we must get very serious about passing legislation that’s going to develop housing quickly.” He pointed out that California can make significant inroads on housing production next year by approving Senate Bill 50, which would allow higher-density multifamily housing near transit and employment centers, and by reforming the California Environmental Quality Act, reducing fees and creating incentives to build.

“There’s a cloud now over whether people will invest in rental housing,” Bannon said. “The only way you’re going to remove that cloud is if, in fact, California, the state legislature, and city councils make a decision that new housing is a priority. And currently, it’s not.”

Rent control is also opening up a new window of angst for apartment investors and lenders across the U.S. Research by Real Capital Analytics (RCA) showed that the push for rent control is resulting in asset repricing that may lead to loan defaults and lower housing availability over the long run. RCA found that in 10 of the 12 regulated markets it looked at, apartment cap rates have increased over the last year: an 83% share. In the remaining markets, only 19 out of 46 markets have seen cap rate increases: a 41% share.

“California is arguably the world’s most dynamic, inventive economy,” said RCA CRE Economist Jim Costello. “So many people have wanted to move there to participate in the success of California that there are not enough housing units to go around. Too much demand, not enough supply, and econ 101 says that prices will rise.”

Costello believes imposing restrictions on apartment rents will change the underwriting assumptions of lenders in California, and might lead to a wave of defaults as assets are repriced. As lenders rethink how assets are financed in California, the crisis in housing will get worse, he predicted.

This discussion won’t be going away anytime soon. Stay tuned for further developments as the pros and cons of further rent control are carefully weighted across the nation.

Share This Post