Commercial Real Estate Debt: The Rising Cost of Housing

Real estate investors mull the ramifications of rent control.

August 22, 2019


This Commercial Real Estate Debt sector report is excerpted from the Third Quarter 2019 Fixed-Income Outlook.

Over the last 10 years, the multifamily sector has had an impressive run, with asset prices increasing over 100 percent and cap rates falling nearly 2 percentage points. As multifamily investors evaluate when the current growth cycle for the sector may close, they have another concern beyond the market: rent control initiatives.

Multifamily Sector Asset Prices Have Doubled in 10 Years

Over the last 10 years, the multifamily sector has had an impressive run, with asset prices increasing over 100 percent and cap rates falling nearly 2 percentage points.

Multifamily Sector Asset Prices Have Doubled in 10 Years

Source: Real Capital Analytics. Data as of 4.30.2019. CPPI: Commercial Property Price Index.

Oregon recently became the first state to mandate statewide rent control, capping owners’ ability to increase rents annually at inflation plus 7 percent. California, Maryland, New Jersey, New York, and the District of Columbia all mandate some level of state or local rent restrictions, and industry experts predict that other jurisdictions will follow suit. Although many states have laws that prohibit municipalities from controlling rents (see map, bottom right), there is increasing pressure to address the demand for more affordable housing by restricting investors’ ability to increase market rents.

Demand for More Affordable Housing Is Leading to More Rent Control Legislation

Although many states have laws that prohibit municipalities from controlling rents, there is increasing pressure to address the demand for more affordable housing by restricting investors’ ability to increase market rents.

Demand for More Affordable Housing Is Leading to More Rent Control Legislation

Source: National Multifamily Housing Council. Data as of 3.13.2019.

In addition to restrictions on increasing rents, some jurisdictions such as New York, which recently made its sweeping rent control provisions permanent, are closing loopholes. In the past, these loopholes allowed a multifamily property owner to bring rents up to market rents when a unit became vacant (vacancy de-control) when the owner invested equity to make improvements to the property, or when a tenant’s income rose to a designated “high-income” level. With these changes, the Real Estate Board of New York predicts that owners will no longer have an incentive to invest in rent-regulated units. With uncertainty around how the new restrictions will impact property values, S&P Global Market Intelligence noted that multifamily loan originations in New York declined by nearly 30 percent year-over-year in early 2019. Access to affordable rental housing has become a rallying cry for a number of the 2020 presidential hopefuls, thus rent control is expected to remain a risk factor for multifamily investors. It is also a mandate that is unlikely to solve the fundamental market disconnect when the demand for housing exceeds the existing supply.

—Jennifer A. Marler, Senior Managing Director; William Bennett, Managing Director; Ted Jung, Director

 
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This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

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