Regulatory Risk Biggest Challenge for Multifamily

Regulations pose the biggest risk for multifamily investment, according to some speakers this week on the New Investment Landscape: What Are the Opportunities and Challenges that Lay Ahead for Investors? panel at GlobeSt Apartments. The panel conversation included Jason Haye, VP and national sales director at Velocity Mortgage Capital; Noah Hochman, co-chief investment officer and head of capital markets at TruAmerica Multifamily; David Harrington, EVP and national director of multifamily at Matthews Real Estate Investment Service; Trevor Koskovich, president of investment sales at NorthMarq; Nat Kunes, SVP of investment management at Appfolio and Chris Nebenzahl, institutional research manager at Yardi Matrix.

Rent control measures, which are sweeping the country as a response to the affordability crisis, is at the top of the list of regulatory hurdles. “The biggest risk we have is regulatory risk,” Hochman said on the panel. “This is a real risk. I think that people need to get involved.”

California, where Hochman’s company TruAmerica Multifamily is based, recently passed a statewide rent control bill capping rent increases at 5%. According to Hochman, this specific bill won’t have much of an impact on the investment market. He called it an anti-gouging measure meant to give some red meat to the constituents. While this specific cap isn’t a major concern, it could be the beginning of rent control measures that are. “There is certainly concern about Draconian rent control,” he says, adding that for now, the measure won’t impact investment appetite. “People still buy rent control properties in L.A., and they still sell at 4% cap rates.”

Harrington agreed that the rent control bill in California won’t really have an impact on current investment or ownership. “A high quality operator isn’t too worried about it. Most people are fine with 5% rent increases,” he said. However, rent control will impact resale property values, and that is a real concern for investors. “The problem becomes when they have to sell, their value is impacted. It is a challenge with rent control, but we know what exists today, so there isn’t uncertainty,” he said.

Still, all of the panelists showed concern about where this will head. Harrington called it the tip of the iceberg, and Kunes added, “No one is worried about a 5% cap, but if that is scaled back, we have to think about who will be buying in that market.”

According to Koskovich, rent control will divert capital to other markets, particularly markets that don’t have the same regulatory hurdles. Those places include markets like Phoenix and Las Vegas, which have benefitted from California’s climate. Koskovich has gotten increasing requests from clients looking to exit California altogether and trade into alternative markets.