What Happens If Vacancy Control Becomes a Reality?

Mark Ventre of Stepp Commercial on the unintended consequences of California's Prop. 21.
Mark Ventre

Prior to the pandemic, the thought of eliminating vacancy decontrol—the ability for landlords to rent a vacant unit at market rate—would have been deemed as reckless government overreach by most reasonable people.

Since the pandemic, however, an increasing number of cities throughout the country are seriously considering the idea of vacancy control—which would restrict the amount that landlords may charge tenants when a unit becomes vacant. California has a ballot measure that voters will decide on next week that would allow for vacancy control. And what happens in California could eventually happen everywhere else.

So if vacancy control is implemented in major cities throughout the country, what would it mean for the multifamily industry? The answer is very simple—the value of many buildings would decrease dramatically overnight.
One of the main reasons investors buy apartments is to bring rents to market rates by renovating units and upgrading the condition of the building, thereby increasing its value and overall cash flow.

The opportunity to add value would disappear should vacancy control be implemented. Why would owners want to invest in upgrades if there is little or no upside?

Most buyers look for a value-add component when purchasing an apartment building, and since this would no longer exist in a vacancy-controlled market, the main reason to invest would be cash flow rather than appreciation. The initial return would, therefore, have to be higher than it would for value-add opportunities, causing prices to plummet.

With vacancy control, small owners and family offices would lose their hard-earned nest eggs. Large operators and institutions whose investors include pension funds, endowments, foundations, insurance companies and trusts would stand to lose billions. Eighty-seven million Americans that own stock in REITs would endure losses, foreclosures would rise, and cities would lose billions in income and property tax revenue.

Furthermore, when buildings are not maintained, neighborhoods eventually become depressed, home values decrease, retail moves away, and urban blight takes over. 

The intent of vacancy control is so that low-income earners can afford to live in markets where they would have otherwise been priced out. But is that what would really happen? The more likely outcome would be that tenants with high-paying jobs and great credit would be the ones awarded the unit. After all, why would a landlord want to rent to someone with poor credit who might not be able to pay the rent? 

It turns out vacancy control would end up having decidedly the opposite effect of its original intent. There are ultimately no winners in this game.

Unfortunately, vacancy control is being sold to the public as the answer to the affordability crisis. Let’s hope voters see through this strategy. 

Mark Ventre is senior vice president with Stepp Commercial.