Let's talk About Rent Control....

[Sean Kelly-Rand]

Hey BiggerPockets Crew - Rent Control proposals are big deal for many national multifamily markets as the trend trickles across the country: Rent control in one form or another seems to be on the horizon for Boston and many cities across the nation. The majority of the population in the majority of the big cities in the country are renters and rents have become, in many regards, unaffordable. So the pressure is on the politicians to 'do something' which rent control seems to be the most politically expedient. 

How are investors taking this into account as they are evaluating markets?

Do you expect major allocation changes? 

Are there hidden opportunities? 

I would love to hear expert voices from around the country.

I've already heard from a few developers that they are struggling to raise capital for new rental developments as investors wait to see if rent control goes through. 

Thoughts? 

@Scott Trench @Lien Vuong @Colin Kelly-Rand

[Scott Trench]

I completely agree with @Russell Brazil's sentiments. Rent control helps existing tenants in select circumstances in a near-term view and select individuals in the long-run (imagine a story about someone who lived in the same place for 27 years in rent controlled San Francisco, and ended up WAY under market). 

While those rare exceptions make headlines and create fear for landlords and investor returns, the reality is that rent control inhibits supply in the medium-long term. The end result is that you get a place like Manhattan or San Francisco, where landlords have 100+ highly qualified applicants for every vacancy, and cottage industries spring up to help renters find apartments. The reality is that most of these tenants will not stay for a decade+ and reap the benefits of rent control (and rent control does not apply to NEW tenants). 

Thus, you destroy opportunity for untold thousands of the very people you want to protect, and ultimately put even more power in the landlord's hands, on average, with rent control. 

The second insidious problem with rent control is that it disincentivizes investment. Take a city like SFO, or nearby Oakland, CA, for example. As a developer/value-add multifamily investor, why on earth would I choose to reposition an asset there? There are plenty of outdated, dilapidated, and (on paper) excellent opportunities to reposition and improve real estate in those cities. But, why bother? One can only terminate a lease for Just Cause, and can only raise rents 3%, unless you get a special exemption from the government. If you can't move out the tenants to reposition the asset... you won't reposition the asset. "Protection" for the tenants in the near term. Slow devastation of a great city in the long-term.

The result is a few years of lower increases for a portion of the population, and then decades of a slow decay/decline of a once great city. 

If cities really wanted to make housing more affordable, they'd override the very stubborn owner-occupants of Single-family homes, and change the reality that 75% of land in most American cities is zoned for single-family exclusively. And, remove as many barriers as possible to investment constantly repositioning real estate to it's highest and best use whenever and wherever possible. 

Boston is worse than average in this regard. 80% of the land in and surrounding Boston's metro is zoned exclusively for single family. It's one thing to have a worldview that supports affordable housing and claim to support policies that promote this.

It's quite another to allow the property across the street from YOUR house be turned into an apartment complex. 

The bad news for America is that the NIMBYism and hypocrisy of a city like Boston imposing rent rent controls, instead of addressing the heart of the problem through zoning (where it will jab at the lifestyles of the wealthy homeowners of it's population) is never going away. 

The good news for landlords and real estate investors is that the NIMBYism and hypocrisy of these cities will ensure limited competition and, long-term, a growing scarcity of housing relative to the population. 

The "hidden opportunity" is a guarantee, over the long-term, of lower prices to buy in today, effectively higher rents (some below market tenants will be offset by higher rents for new tenants due to lack of supply/competition), and low cap rates, because vacancy/occupancy will be so predictable. 

Rent control is a gift, not a curse, for landlords in the medium-term to long-term, at the expense of all the future renters who move to that city or vacate for any reason. 

Who made more these last 15 years? The multifamily owner in San Francisco or Manhattan? Or the multifamily owner in Atlanta, GA? Excluding the last 1-3 years, it's SFO all day.