When renters fled urban centers for the comforts of suburbia in the 1970s and 1980s, rent control fell out of fashion and was outlawed in more than half of all states. However, now that populations (and cost of living) have once again swelled in cities like New York, Los Angeles and San Francisco, rent control is back.
States like New Jersey, Hawaii, Illinois, Minnesota and Washington have all introduced residential rent control bills in the last three years. Oregon recently became the fifth state to authorize rent control and the first to impose it statewide. With legislation on the rise, new scrutiny has been put on rent control’s effectiveness, and the debate continues.
Implemented by governmental authorities, the intent of rent control is to keep living costs affordable for lower-income residents by limiting what a property owner can charge a tenant to live in a specific apartment. The earliest example of rent control was instated in 15th century Rome to protect Jewish residents from becoming the victims of price gouging. The term “rent control” has a connotation of being for the greater good; in its ideal form, it calls to mind images of families secure in their home neighborhoods, not pushed out by mounting costs.
“Rent control appears to help affordability in the short run for current tenants,” according to a Brookings Institution article by Rebecca Diamond, Stanford Graduate School of Business associate professor of economics. “But in the long run [it] decreases affordability, fuels gentrification and creates negative externalities on the surrounding neighborhood.” In short, rent control can be a good quick fix, but its long-term consequences are overwhelmingly negative.
How can this be?
Breaking Down the Paradox
One of rent control’s major impacts is decreasing renter mobility, meaning people who benefit from rent control are less likely to move to new addresses. While this means people keep their homes, it also reduces housing stock in areas where housing is in high demand. Because high-demand areas tend to be subject to rent regulations, decreased renter mobility means increased prices for what options remain.
It boils down to a basic economic principle: High demand + low supply = high price. Higher prices prevent all but high-income people from moving in, resulting in an increase in gentrification — exactly the opposite of what legislators intend with rent control.
Additionally, because rent control can cause landlords to charge below-market rates, landlords end up with less cash at their disposal for repairs and renovations. Over time, this means buildings don’t get the attention they need, hurting both property values and quality of life for residents. In one particularly jarring statistic, a Cambridge, Massachusetts rent control policy was found to have “imposed $2 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.”
In San Francisco, property owners have subverted rent control by leveraging the Ellis Act, which permits them to “evict tenants in order to ‘go out of business.’” This typically happens so that property owners can convert the buildings into condos, which are exempt from rent control regulations. In this situation, residents who might otherwise benefit from rent control could face eviction.
Opposing Forces
The unfortunate truth is that rent control often operates counter to its stated purposes. Accordingly, concerned parties have gone to great lengths to block additional regulations. In 2018, the Realtors and Apartment Owners Association spent upwards of $600,000 campaigning against California’s Measure W — which would tie annual rent adjustments to the percentage increase in the Consumer Price Index (CPI), but never in excess of 5 percent — ultimately netting 54 percent of the vote, and preventing the legislation from going into effect.
Recently introduced commercial rent control legislation has produced similar ire in New York City. While residential and commercial rent control are separate issues, some fear that residential rent control’s adverse effects could well play out in the commercial sphere. Advocates argue that regulations will protect local businesses, but critics say they would give too much power to struggling retailers in prime locations.
In an impassioned blog post, New York-based real estate lawyer Bruce M. Stachenfeld foresees “capital [fleeing] a regulated real estate industry,” which means “tax revenues will drop, construction jobs will drop, and the vibrancy of the city will decrease.” Commercial rent control remains a question having not yet been signed into law, but the developing issue is worth attention.
Keep a Level Head
In an interview with REIT Magazine, Burton Malkiel, an often-cited economist and author of the influential text “A Random Walk Down Wall Street” (1973), contended that compared to other assets, “the relative position of real estate has actually improved,” and that “it will continue to be one of the more reliable inflation hedges among all the asset classes.” However, with rent control artificially limiting real estate’s inherent ability to hedge against inflationary forces, rent control (for both residential and commercial properties) may change this dynamic for selected high-value markets.
We at Bloomfield Capital remain tuned to the complexities of the modern real estate finance landscape, and bring this same attention and expertise to our clients. Deep comprehension of the trends and debates surrounding rent control is part of the knowledge base which allows us to evaluate prospective deals with acuity and confidence. While the composition and rules governing American real estate are changing, we remain attentive, focused and committed to our clients’ success.
