Impact of Rent Control Policies

Economic research has universally shown that rent control laws can lead to a reduction in the available supply of housing by reducing the financial incentive for developers to add new units. Moreover, such ordinances also can create a disincentive for multifamily building owners to make capital improvements to their properties by reducing their potential return on investment. Hence, renters can face worsening market conditions with less supply and diminishing quality of rental properties over time. The experience of St. Paul, Minnesota offers a window into this dynamic. In November of 2021, voters in the city approved the Rent Stabilization Ordinance, one of the strictest rent control policies in the nation. The measure, an attempt to address the shortage of affordable rental housing in the city, capped rent increases to no more than 3% over a 12-month period. The new ordinance was made effective across the board, offering no exemption for lease renewals or a new lease. There were also no exceptions for newly constructed buildings, a common practice in other rent-control measures. The impact of the policy on the multifamily market in St. Paul was immediate. Units under construction, which had peaked during the quarter that the vote occurred, dropped by 28% in six months as construction starts on new multifamily units ground to a halt. Some argued the ordinance had the opposite of its intended effect. By turning off the pipeline of new housing units in the city, the policy effectively took away the single-most effective means for keeping rents low, which is increasing supply. https://lnkd.in/gbavU2zu

The White House just announced a plan to install rent control AND build more housing. This is like arguing we can cap prices for organic foods AND produce more of them. Unlike the President’s prior housing proposals (which I've defended), this one seems hurried and unserious. Here’s why: 1) President Obama’s top economist, Jason Furman, said it best in the Washington Post: "Rent control has been about as disgraced as any economic policy in the tool kit. The idea we’d be reviving and expanding it will ultimately make our housing supply problems worse, not better." 2) Furthermore, as the Washington Post pointed out: "Experts on both sides of the aisle tend to argue that government limits on rent discourage new development." No serious policy proposal ignores bipartisan expertise. This is NOT one a red vs. blue issue. 3) It specifically targets only "corporate" owners with 50+ units. This means renters in two neighboring, identical properties could have different benefits. Why does one renter deserve a rent cap and the other does not? If the White House honestly believed rent control was a good idea (and I’m skeptical they do), they wouldn't play favorites. In effect, this cap applies to an even a single apartment owner (since many are 50+ units) while exempting most SFR owners (despite rents growing faster in SFR). 4) The White House specifically cites an activist concluding that apartment REITs "reported large profits." Anyone who tracks public companies know apartment REITs are hardly the darling child of Wall Street these days. The "analysis" did not compare REIT profit margins to other sectors nor did it point out that property values are down around 20% from peak – a much sharper correction than other industries. 5) The White House claims its plan "effectively balances the needs of tenants without limiting incentives for more supply." This is peak idealism. Annualized multifamily starts plummeted 51.7% YoY in May, according to the U.S. Census, and that drop can be traced to higher interest rates plus (ironically) flat-to-falling rents for new construction. While the White House did include some positive steps for construction (such as repurposing some federal land for affordable housing), it's not nearly enough to offset macro challenges facing apartment developers. 6) The White House said "more units are under construction than at any time in over 50 years." This is no longer true. Housing construction, according to the U.S. Census, peaked in Oct 2022 at 1.71mm units, and it's trending down fast due to falling apartment starts. 7) The White House exempts new construction, but for investors who fund new housing development, that's an empty promise. Look at New York, where rent control has been revised four different times to "recapture" units previously exempt. #housing #rents #SFR #apartments https://lnkd.in/gk2_FpGT

Rent control: the cure that’s worse than the disease. When the Dutch government introduced expanded rent control measures in July, the goal was to make rental housing more affordable. The idea was simple: cap rents to ease the financial burden on tenants and create more affordable living options. But instead of achieving its intended outcome, the policy has made things worse. Landlords, no longer able to charge market rates, have begun selling off their rental properties. This has significantly reduced the number of available rental units, making it harder for renters to find housing. The irony is clear: a policy meant to increase affordability is actually shrinking the supply of rental homes and exacerbating the struggles middle-income renters face. The situation is even more dire when you look at new construction. The Netherlands needs around 100,000 new dwellings each year to keep up with population growth. But over the past decade, it’s averaged only two-thirds of that figure. This shortfall has driven up prices for unregulated flats by a staggering 33% since 2012. The rent caps have further discouraged developers, slowing the pace of new apartment construction and exacerbating the housing crisis. And while the tight rent controls do benefit some at the lowest income levels, it’s middle-income renters who are feeling the squeeze. Those just above the threshold for subsidized housing are being pushed into a shrinking private rental market with fewer choices and steeper competition. The lesson here is one we’ve seen play out repeatedly: rent control, despite its good intentions, doesn’t solve the affordability problem. The Dutch housing market is just the latest example of why focusing on rent caps, rather than increasing supply, often does more harm than good.

Rent caps in the White House—another uninformed approach to solving housing issues. The President’s proposed cap of 5% annual rent increase for housing providers with 50+ units 𝘴𝘦𝘦𝘮𝘴 like a smart solution... but evidence suggests otherwise. Research by American Economic Association on San Francisco's rent control policy shows the opposite. While it temporarily reduced displacement, 𝗥𝗲𝗻𝘁 𝗰𝗮𝗽𝘀 𝗱𝗲𝗰𝗿𝗲𝗮𝘀𝗲𝗱 𝗿𝗲𝗻𝘁𝗮𝗹 𝗵𝗼𝘂𝘀𝗶𝗻𝗴 𝘀𝘂𝗽𝗽𝗹𝘆 𝗯𝘆 𝟭𝟱%, causing higher market rents over time. Here's how it backfired: 1. Landlords converted rentals to condos or redeveloped properties to escape rent control. 2. It drove gentrification, attracting wealthier residents and widening income inequality. 𝗧𝗵𝗲 𝗿𝗲𝘀𝘂𝗹𝘁: Rent control undermined its own goals. 𝗦𝗼, 𝘄𝗵𝗮𝘁’𝘀 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝗶𝘀𝘀𝘂𝗲? There isn’t enough housing supply to meet demand. And what’s the alternative? ✅ Reduce regulations to incentivize new developments. ✅ Expand Low-Income Housing Tax Credit (LIHTC) tools. ✅ Push for high-density zoning at the state and local levels. ✅ Encourage the use of price management software for smarter rent-setting. The real solution is more housing, not rent caps. 𝘙𝘦𝘴𝘦𝘢𝘳𝘤𝘩 𝘩𝘦𝘳𝘦: https://lnkd.in/gcmf8NAg #rentcontrol #realestatesolutions #housingsolutions

Joe Biden is set to propose a 5% rental increase cap for multifamily owners of 50 or more units. What does it mean the housing crisis and the commercial real estate industry? **Positive Effects** 1. Tenant Stability and Affordability - A rent increase cap would stabilize tenant expectations, ensuring rents can only increase by 5% annually, helping tenants manage their budgets and avoid sudden rent hikes. - The cap could contribute to housing stability, allowing tenants to stay in their homes longer without fear of being priced out. 2. Market Demand - More stable rents might make renting more attractive than homeownership, potentially increasing demand for multifamily units. **Negative Effects** 1. Investor Returns - The cap would limit income potential for property owners, particularly in high-demand markets where rents typically rise faster, potentially reducing overall returns. - Lower rental income growth prospects could lead to decreased property values, making investments less appealing. 2. Maintenance and Upgrades - Property owners might reduce maintenance and improvements to maintain profitability, leading to a decline in property conditions. - Owners may be less inclined to invest in property upgrades if they cannot recoup the costs through higher rents. 3. Discouraged New Development - A rent increase cap could deter new multifamily development projects due to lower potential returns, slowing down the construction of new rental units. - Investors might shift focus to markets or property types not subject to rent controls, potentially reducing the supply of multifamily housing. 4. Economic Impact - Market Distortions: Capping rent increases can lead to reduced mobility and an imbalance between supply and demand, as tenants might be less likely to move due to stable rents. - Shadow Markets: There could be an increase in non-traditional rental markets where rent control laws are circumvented through various means. Biden's new proposals acknowledge the real problem of housing affordability and the instability that many renters face in today's market. However, it may not be the right solution as it could lead to reduced investment in new housing and deferred property maintenance. What do you think? #commercialrealestate #Housing #realestate

I recently listened to an excellent podcast featuring two of my favorite thought leaders in #CRE and business, Walker & Dunlop Chairman and CEO Willy Walker and Rental Housing Economist Jay Parsons. They covered various topics relevant to the U.S. rental housing market. It’s an incredibly worthwhile listen for anyone focused on this sector of CRE.   Around the 44-minute mark, Jay and Willy discuss the unintended consequences of rent control policies, using St. Paul, MN, as an example. After enacting rent control a few years ago, the city saw new rental housing development grind to an immediate halt. St. Paul missed out on the largest construction boom for rental housing in over 40 years—an opportunity that could have significantly eased its affordable housing shortage.   This topic resonates deeply with me. While rent control is often introduced with the best intentions, the reality is that it discourages investment and reduces housing supply, ultimately worsening affordability challenges. To truly address housing needs, we need strategies that expand supply, not restrict it. Public-private partnerships and incentives to spur development are the sustainable solutions we should prioritize.   This podcast is a must-listen if you're navigating the multifamily and rental housing space. It offers important insights and underscores the need for smarter approaches to housing policy. Check out the podcast episode: https://lnkd.in/g4dkdQwb

Perhaps this is one of the most toxic markets for apartment landlords, which explains several reasons why we have not participated in these sales. This Bloomberg article lays it all out succinctly and accurately. The 2019 New York rent control laws have had a profound impact on the real estate market, affecting landlords, tenants, and property values significantly. These stricter rules were designed to limit rent increases after renovations and maintain affordable housing, but they have resulted in a sharp decline in property values, with buildings containing rent-stabilized apartments experiencing a 34% drop in value since the laws' implementation. This downturn has led to financial distress for many landlords who are now struggling to keep up with mortgage payments, as highlighted by the experiences of Douglas Peterson and the concerns of investment firms like Maverick Real Estate Partners. The repercussions of these rent control laws extend beyond individual property owners to the broader market, with the Federal Deposit Insurance Corp. offloading billions in loans at a discount due to real estate exposure concerns. This market shift has prompted discussions about the balance between protecting tenants and ensuring the viability of the real estate market. The debate over affordable housing has intensified, with landlords arguing that rent regulation discourages investment in property upgrades and tenants viewing it as essential for preventing rent spikes and promoting stable, affordable housing. Internationally, rent control is seeing a resurgence as governments seek to combat rising rents in major cities. The effectiveness of these policies is a matter of debate among economists, with some advocating for regulation tied to inflation and others proposing targeted subsidies as a more effective solution. New York's own history with rent regulation, dating back to the 1940s, provides a complex backdrop to the current situation, illustrating the challenges of balancing housing affordability with market dynamics. The decline in property values and the subsequent market downturn highlight the need for a nuanced approach to housing policy that considers the interests of both tenants and landlords. As discussions continue, the experiences of those affected by New York's rent control laws serve as a crucial reference point for understanding the impact of such regulations on urban housing markets. The evolving situation underscores the importance of crafting policies that support affordable housing while encouraging investment and maintenance of properties. Click here to access this Bloomberg article: https://lnkd.in/eP6iTDke #LinkedInHashtags: #RealEstate #AffordableHousing #RentControl #NYCRealEstate #PropertyInvestment #HousingPolicy #MarketDynamics #TenantRights #LandlordChallenges #UrbanDevelopment