Obviously there are other factors helping to push up these cap rates, he writes. "The increase is mostly focused on the more expensive markets in the US where cap rates are structurally lower, and as investors worry about how much cap rates will move up when interest rates do again someday, some of the repricing may be a function of investors unloading a portion of that rate uncertainty."

That said, other factors suggest that a good portion of the move is due to the capital restrictions that come with the imposition of rent control, he continues, pointing to a Wall Street Journal article that reported how the stock price of banks lending in the New York apartment market were savaged when stricter rent controls were introduced earlier this year. "Some of those losses have been reversed since, but a lender with exposure to New York apartments is still in an awful situation where the assets for which they have loans face higher credit risks moving forward," Costello writes.

Thus a less-than-virtuous circle is introduced. Income cannot keep up with the previous underwriting so lenders will need to scale back what they can finance. Investors looking at the market with more limited, and therefore more expensive, financing options, cannot pay as much for an investment which will help to suppress prices. That price suppression comes back around to the lenders then being even less willing to extend credit.

Costello thinks that, given the run-up in apartment asset values in recent years, the increase in cap rates is not likely enough to drive a wave of loan defaults. But if it continues, he warns, fewer finance options will lead investors to limit capex, withdraw units, and/or deliver even fewer units of new construction.