Apartment Affordability Answers: Boom or Boomerang?

ARLINGTON, VA—When an apartment boom is still needed, many municipalities are instead promoting a boomerang policy. Rent control has a deleterious effect on multifamily cashflow, property values, maintenance spending, new construction and more in the $3.4 trillion-plus real estate sector, reports Paula Munger, director, industry research & analysis, at the National Apartment Association (NAA).

“I can’t stress this enough, and it’s one of those things that economists largely agree on: It turns out rent control yields the opposite effect of what it’s intended to do,” Munger says. “Proponents say it will help with the affordability crisis, but it inhibits supply and older properties getting upgrades.”

With housing affordability a major concern nationwide, rent control measures have received greater focus and consideration. Oregon and California have passed statewide caps on rents, while New York City and Washington, D.C. have also expanded rent regulations.

With the “Modeling the Impacts of Rent Control” study, the NAA has thoroughly researched the impacts of rent control in four major metropolitan areas. For example, it found that with a seven percent annual cap on apartment rents, 100 percent of Chicago’s future apartment housing stock needs may be infeasible. It is projected that 35,225 units would be needed through 2030, but 46,300 would be at risk.

While perhaps causing unintended consequences at the policy level, rent control clearly triggers a downward spiral for owners, developers, stakeholders and others. A cap on rent obviously restricts cashflow, which negatively affects property values and thus tax revenues. It also disincentivizes developers and investors from putting their time, effort and capital into a market. Rent control also means there is less money to spend on maintenance and building improvements, a growing need given the amount of U.S. apartment stock constructed before 1980.

“With new construction [in a rent control market], it’s not really a domino effect so much as it becomes a market that an investor or developer does not want to be in,” Munger adds. “’If it’s not profitable, I’ll take my money to another market or another product type altogether.’”

There’s no denying the troubling trend of rising housing costs, nor the pressing need for more stock, including 4.6 million new rental units by 2030 just to keep up with current demand, according to the NAA. Is there an alternative plan or some sort of compromise on the issue of rent control versus housing affordability?

“Municipalities like Minneapolis, San Diego, Dallas and others are taking notice,” Munger says. “They’re looking at outdated zoning, reducing zoning application fees and waving parking requirements. We plan to continue this research and roll it out to other markets in the future to weigh specific policy proposals.”