Rent Control Heats Up Amid Challenges From Industry
Multifamily leaders weigh in on local legislation and ballot measures that have nationwide implications.
Kingston, N.Y., a picturesque town on the Hudson River 90 miles north of New York City, could be a sign of challenges ahead for the multifamily industry.
In August, Kingston became the first city in upstate New York to adopt rent control. Declaring a housing emergency under the state Emergency Tenant Protection Act, the Kingston Common Council voted to adopt rent stabilization.
Approximately 1,200 rental units are affected. Landlords will only be able to increase their rent by a percentage determined by a nine-person board. Now the apartment industry is watching to see whether other municipalities in the region will follow in Kingston’s footsteps.
The national housing crisis has made rent control a hot topic all around the country. According to research by Redfin, rents in many U.S. cities have risen by more than 30 percent. Some organizations, including the National Low Income Housing Coalition, are in favor of federal rent control to eliminate what they see as price gouging.
“Our position is that these are failed policies that go by a number of different names nowadays, but ultimately they work against housing affordability because they reduce the quality and quantity of the housing stock,” said Nicole Upano, assistant vice president of housing, policy & regulatory affairs at the National Apartment Association.
Likewise, the National Multifamily Housing Council cites decades of research supporting the detrimental effects of rent control. “We recently surveyed NMHC members and 60 percent of multifamily firms were actively reducing or avoiding investments in rent-controlled markets. Another 15 percent were considering doing so,” said Jim Lapides, vice president of advocacy and strategic communications at NMHC.
This trend is counterproductive at a time when increasing supply is critical, he adds. “Unfortunately, rent control has the exact opposite effect. It exacerbates the very problem we’re trying to solve.”
Rent control spreads
“Policymakers are looking for that short-term fix to be able to satisfy their constituents and help them, especially during hard times. Since the pandemic, it’s become an even more heightened area of interest,” said Upano. “We’re seeing rent control pop up in areas around the country that you would never have (expected) to see them pop up.”
In Portland, Maine, for example, the rent control ordinance approved by voters in November 2020 went into effect on Jan. 1, 2021. It established the rate charged in June 2020 as the base rent for most units and capped annual increases. This ordinance applies to both long-term and short-term units. It also established a rent board to conduct hearings and consider landlord requests for rent increases.
In June, neighboring South Portland followed suit, issuing an emergency ordinance that will remain in effect through November. That measure established an eviction moratorium and capped rent increases at 10 percent annually.
Another hot spot is Albuquerque, N.M., where the city council is considering a resolution that would ask the state to remove its rent control preemptions. Though the resolution is non-binding, approval by the city council could hint at public sentiment in New Mexico’s largest city. “There was a large protest there from renters’ rights advocates, and with that kind of pressure we’re certainly concerned about what could potentially happen there,” said Upano.
Many Florida markets have also had serious discussions about enacting rent control. Florida has a statewide preemption on rent control unless a municipality declares a housing emergency. The city council or county commissioners can then put forth an initiative that is put to a public vote. Orange County commissioners approved a measure for the November ballot that would allow for rent control in a limited capacity that aligns with the state preemption.
“It’s a bit of a unique situation,” Upano observed. Thirty-one states prevent local governments from adopting rent regulation, but according to Upano, Florida allows for limited rent control when there’s a grave housing emergency. The Florida Apartment Association and the Florida Association of Realtors recently sued Orange County in an attempt to halt the ballot initiative.
“Barring a last-minute successful legal challenge, it is highly likely that voters in the Orlando area are going to have the opportunity to vote on rent control. And that’s a huge risk for the industry there,” said Lapides.
What happens in Orange County is being monitored by municipalities around the country and especially in Florida. “There’s so much continued pressure on rents in Florida and pain points for renters and pain points that are forcing legislators to consider possibly harmful short-term options,” said Upano. “Places like Miami- Dade (County) are closely watching what’s happening in Orange County to see whether their rent control policy will pass muster.”
Walking back restrictions
Last Fall, in St. Paul, Minn., voters approved what was considered at the time to be the most restrictive rent control ordinance in the country. It capped rent increases at 3 percent. There was no exemption for new construction or for when residents move out.
“Immediately, St. Paul had this huge blowback from that regulation,” Lapides noted. “Construction permits plummeted by 80 percent—investors and the industry pulled out because they couldn’t make this work. The effect was devastating.”
In September, the St. Paul City Council voted to allow landlords to raise rents by 8 percent plus inflation if a tenant moves out. They also added a 20-year exemption for new construction. According to Lapides, these fixes were telling because usually housing policy takes years, if not decades, to see the results.
“In St. Paul, they are walking back their very Draconian and inflexible rent control policies, because they’re seeing such a huge drop in permitting,” said Upano. “And that’s what we have been saying for so long regarding the very detrimental effects of rent control.”
This year several rent control ballot initiatives have been thwarted. In North Las Vegas, the local culinary union attempted to place an initiative on the November ballot. It was struck down due to a technicality regarding how signatures were collected. But the apartment industry predicts the that the union will try again and also push for statewide rent control.
In June, the Ohio legislature closed the key loophole in the state rent control law. Ohio cities are now blocked from imposing rent control measures on landlords.
The midterms may be telling, as well. To name one example, observers think it’s highly likely that Massachusetts will elect a Democratic governor who may be more open to rent control than others have been in the past.
“The midterms could play a huge role—will legislative chambers change, or will they become more or less progressive? Those are things we’re watching very closely in the midterms,” said Lapides. “And of course, in Orange County rent control is on the ballot this fall.”
Looking at the economics
For a variety of reasons, the most attractive locations for multifamily firms to do business are in those 31 states that have rent control preemptions. But there are no guarantees. Even in landlord-friendly Texas, inflation and severe housing shortages could push some cities toward rent control.
“We have to invest in projects and in markets where we can earn an appropriate risk-adjusted return,” said Laurie Baker, COO of Camden Property Trust. “There are always cost considerations and that’s what’s missing in these rent control conversations. Nobody is talking about the increase in costs. But you (need) revenues to offset the increase in taxes, increases in insurance, increases in salaries and the maintenance. It makes the numbers difficult to achieve if your rent growth is capped at some arbitrary number.”
Camden operates a geographically diverse portfolio of multifamily assets in 15 high-growth, business-friendly markets. The company is constantly seeking opportunities to expand its operating platform through new development or acquisitions. But Baker noted that the expansion of rent control in a market—especially for newly constructed properties—quickly changes the economics and negatively impacts the feasibility to develop.
Camden keeps an eye on regions that show signs of becoming less landlord-friendly. More California cities, for example, are showing an interest in rent control since the California Tenant Protection Act went into effect on Jan. 1, 2020. This state law limits rent increases and removes the right of landlords to evict tenants without just cause. It also restricts the allowable annual rent increase to 5 percent plus a local cost-of-living adjustment of no more than 5 percent for a maximum increase of 10 percent.
“Orange County, Fla., has been a topic of discussion, so we’re monitoring that market and what happens in the coming elections because we have 10 communities there,” said Baker. “We’re also keeping an eye on Colorado. In the last couple of years there have been some proposals in certain areas for rent control.”
The rent control discussion is happening all around the country. Lapides warns that the apartment industry must be mindful, vigilant and vocal. “No other group or industry is going to rescue us from these bad policies,” he said. NMHC has developed resources available at GrowingHomesTogether.org to help the industry talk about housing affordability and rent control.