Rent Control: Is the Reality Worse Than the Myth?
With new rent control regulations recently imposed in New York and Oregon, the multifamily industry is bracing for long-term impacts. Will more states follow suit?
Some New York landlords were stunned when Albany legislators passed historic rent controls in June, with many saying it equated to a death knell for owners and operators of multifamily properties in the state. Meanwhile, tenants and tenant advocacy groups praised the move as a form of much-needed protection in a city with steep costs and a deep housing crisis.
Just four months earlier, Oregon lawmakers had passed the first-ever statewide rent control bill, which includes limiting rent increases to 7 percent a year and requiring landlords to present eviction reasons. The measure, while not immediately affecting the industry to a large extent, opened an avenue of potential future limitations.
Rent control has been one of the biggest stories in real estate this year. And while the issue remains contentious, many in the industry are already wondering if this trend is set to gain footing across the country.
The concept of rent control started as an emergency measure in the 1940s, following the outbreak of World War II. Today, five states—California, New York, New Jersey, Maryland and Oregon—and Washington, D.C., have some form of rent control in effect at the state or local level.
One of the main arguments surrounding the debate is that while the regulations are well-intended, they don’t serve the purpose. Landlords and multifamily professionals often point to a study conducted by Stanford University on rent control in San Francisco, which ultimately concluded that such programs were counterproductive and led to greater inequality in the city.
Luise Barrack is a real estate attorney at Rosenberg & Estis in New York City, where she works with a variety of landlords and developers. For weeks after the new statewide regulations went into effect, she was working 18-hour days, fielding question after question from clients.
“What was most concerning was that it was effective immediately,” said Barrack. “The industry is still sort of reeling and regrouping and trying to make sure they’re not running afoul of the statute.”
“I think there will be folks that inadvertently violate the laws because they don’t know, they’re small, may not have resources and know the changes they really need to know,” Barrack added. She urged landlords affected by the new laws to carefully read the regulations and make sure they’re not running afoul.
Many of Barrack’s clients feel that the new laws are overreaching and take away the ability to make money. If rents are frozen but taxes continue to rise—with the addition of operational costs and maintenance—it will create substantial hardship for owners, especially in the case of small landlords. This July, landlord groups filed a lawsuit in federal court challenging the new laws, on the basis that the regulations violate owners’ constitutional rights.
The long-term impact, however, is yet to be seen. Some worry that the changes take away the incentive for updating buildings, with new rent growth caps depending on renovations. Mark Willis, economist and senior policy fellow at New York University, thinks that property values are the first to be affected.
“People who own buildings with rent-stabilized units will definitely see a drop in the value of their buildings, and it could be substantial,” he said.
The Other Side of the Coin
Tenant advocacy groups argue that there’s a disconnect between historic trends and what landlords expect in terms of returns. Emily Goldstein is the director of organizing and advocacy at the Association for Neighborhood and Housing Development, a New York City nonprofit that advocates on behalf of tenants. Goldstein and her group are “extremely happy” the rent reform measures passed, something they were pretty confident would happen.
Goldstein pointed out that, historically, rent-stabilized assets returned about 6 percent in profit per year. “Not exorbitant, but a reliable safe investment,” she said. It was only in the last 15 years or so, with the influx of private equity and other forms of capital looking for new investment opportunities, that expectations shot up to 15, 20 or even 25 percent.
“That’s a new expectation, not a historic trend,” she said. “You’ll make a profit, just a limited one, is a very different thing than the notion landlords have that the sky is falling. It’s just about reducing profit margins, not that you can’t maintain the building.”
What the Future Holds
Recent regulations have led many real estate professionals to wonder whether more states will consider similar measures. Last November, a statewide ballot measure was introduced in California that would have made it easier for local jurisdictions to expand rent control, but got voted down. Doug Bibby, president of the National Multifamily Housing Council, said he would not be surprised if other states were looking to replicate measures implemented in Oregon and New York.
“People are looking at what’s happening out there and saying hey, maybe we can do it in our community as well,” Bibby told Multi-Housing News after the passage of New York rent regulations.
His organization created two comprehensive resources—The NMHC Housing Affordability Toolkit and GrowingHomesTogether.org, a co-venture with the National Apartment Association—that offer a roadmap for state and local governments meant to boost the creation of affordable housing while avoiding “no-win solutions,” rent control included.
“Our whole point with the Toolkit and Growing Homes Together is that there’s another path,” said Bibby. “And we need to change the conversation about this.”