Oregon Declares Statewide Rent Control

[Johnny Pineyro]

Mates,

Curious what the collective thoughts are on this recent legislation and how it can impact us as investors in the multi-family space in that state?  I understand there are limited exceptions to implementation as in San Fran, NY, etc.

[Arie Van Gemeren]

I live in the SF Bay Area, and invest in Portland, Oregon - so I guess I have 100% exposure to rent control now? ;)

Anyways, I recall speaking with a successful syndicator in this area who invests in Oakland CA (and elsewhere in the state - true, Sacramento does not have RC - but has high exposure to rent control) and asking his opinion. He had an interesting comment - your rents aren't going to go down. In other words, what you buy at is typically the floor, and while the growth rate is slower than you'd like it it will always be on a steady uptrend. By the way in Oakland / San Francisco you can't increase more than like 2%, so it could be worse. 

As regards Oregon, the number right now is 7% + CPI. They could always ratchet that down, but to me 9% YoY increases is a respectable number if you're a buy and hold investor. I can't speak to trying to make a quick flip, not my business - presumably it's not as good a situation as you can't wholesale evict now or massively raise rents, and or change the dynamic of the building in under 2 years.  But that is my 2 cents from an "investment" perspective, I suppose, that's worth considering. 

I believe the "evidence" is pretty strong that rent control doesn't work (of course, I'm preaching to the choir, and will say later why I think RC is actually good from a messaging standpoint). If you scan multifamily listings in Oakland (which I do periodically) I'm always struck by a) deferred maintenance, and b) tenants who are stubbornly stuck in place and whose units are really run down and living in bad conditions. I'm less talking about the other known "evidence" which is that it has the opposite effect you desire - rents for actual renters on the market (I recall my wife and I trying to find an apartment in San Francisco in 2011 and 2012, and there being lines out the door and having to bring pay stubs plus your letter of reference from your parish priest - j/k on that last one, but it did feel that way). Capitalism works in such a way that individual initiative and desire to put capital at risk is what drives things forward, and many of the really beautiful buildings in Oakland (to me) appear run down because that equation has broken down. In fact, most of the "housing distortion" you see in these markets I think can be identified from the regulations that were trying to solve a real problem but just got in the way and either made building new apartments more difficult, or maintenance and improvement of neighborhoods more difficult. 

OK - so why isn't it the end of the world in my view?  

I link the above image with the caution, there's risks to using data at such a high level. "Real Household Income" and "Real Median Rents" spread across the entire country doesn't capture the intricacies of local markets, of rising income in the SF Bay Area (or Portland, OR, etc.) driving higher investment and rent.

However, the point remains. Rents have been rising (in general) at a much faster rate than wages. That's not sustainable. At some point, you price out the majority of people. Cities are not wrong to be worried about this. I believe it's right to ask if it's OK to wholesale "move" communities (which are often poor or minority communities) that are in the path of progress. For me, it's hard - especially when dealing with the elderly, etc., and one must admit that the optics are not great. At the same time, as a capitalist, you want free reign to do what you please with your $. Also, there is a number (I don't know it) at which rents will naturally be capped and you go higher and you spark moveouts. Laissez Faire economists would say that that number is good, you probably push through it, and it sparks all manner of innovation - new buildings, ADU investment and building, investors putting capital at risk to take advantage of the opportunity which sparks more supply which drives prices down. But the messaging of vastly rising rents and gentrification are hard, especially in a democracy.

Which (sorry for the long-windedness) leads to my final, more philosophical point - landlords are not a loved minority. I think the investor group is quite easy to demonize, and many groups do a good job doing so. It's rarely a losing point for a politician to speak to voters (the predominance of whom are not landlords) and say that landlords are causing the trouble. If rent control takes the steam out of the kettle, so to speak, and reduces the antagonism towards landlords, it's probably a good thing. The number 1 thing we should be concerned about is stability. Social stability, economic stability, political stability, etc. Do I want it to be this way? Not really, I think one should have the freedom to pursue what you want without such constraints, but to ignore reality is a bad strategy in general and much worse than 'rent control' could come down the pipe. i was reminded of this recently when looking @ a property in Berkeley, CA and being told that in that great city you are less the "owner" of your building and more the "caretaker" while the city gets to decide precisely what you're allowed to do with it (by the way - capped rent increase in Berkeley is 2/3 of regional CPI, and if you don't follow a HUGE checklist you can't raise rents at all!).  

Ray Dalio has a great read on the rise of populism which I think speaks to the concern about both the concentration of wealth and more. I'm not saying RC will end it, and I actually suspect that in Portland's case they passed this legislation at or close to the end of the cycle and rents will probably moderate out just as new supply hits the market making this whole thing a moot point. But at the end of the day, I think everybody benefits from a calmer environment and more stability. RC seems to me to be counterproductive in the long run but perhaps in the short run (speaking very specifically to Portland now) a RC which caps rent at 7% + inflation isn't the worst thing that could happen.