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In 2019, growing concern about a lack of affordable housing led legislatures in the nation's two largest multifamily markets — New York and California — to enact rent stabilization measures. Of the two, the New York laws were more restrictive, limiting the ability of owners to raise rents after renovating rent-stabilized apartments and to deregulate them when rent crossed a set threshold. In California, Gov. Gavin Newsom signed a bill that restricts landlords from raising annual rent more than five percent above the local cost of inflation. Properties built within the last 15 years are exempt, and the bill sunsets in 10 years.
While Fannie Mae and Freddie Mac remain committed to preferential pricing for affordable housing, the trend to more stringent rent regulation has made some members of the multifamily industry apprehensive. They fear that these laws will depress property values and discourage owners from renovating properties.
There's More Smoke Than Fire
This uneasiness was only partially reflected in Capital One's annual survey at the GlobeSt. Apartments Conference in Los Angeles. Asked to gauge the likely impact on investor strategy of the ongoing push for housing affordability, close to 60 percent responded that investment would shift to new markets or property types. At the same time, only 14 percent of respondents forecast a decrease in overall investment and more than a quarter, 28 percent, said there would be no change at all. In other words, the consensus view is that the multifamily market provides a variety of options for resourceful investors.
A similar conclusion can be drawn from a related question in the survey. Respondents were asked to imagine the effect of rent control on their primary market. Here again, 28 percent of respondents said it would have no impact whatsoever, while 45 percent said that it would somewhat reduce activity. Only 18 percent said it would dramatically dampen investor interest.
It is important to stress that these responses are largely hypothetical. Rent restrictions are almost exclusively a bicoastal phenomenon, at least for the moment. In addition to New York and California, Oregon passed a statewide rent cap last year, and the District of Columbia is considering expanding its rent regulations.
But even in areas in which it is an issue, the spread of responses — especially to the question about affordability — highlights the fact that rent regulation is just one of many extrinsic considerations — like zoning, insurance, and taxes — that investors routinely factor into their decision-making. There will, no doubt, be a subset of instances where rent regulations may constrain investment, but in many others, investors will find a way, perhaps through creative financing, to dampen their impact.
Financing Can Make the Crucial Difference
Whether investors are active in areas where rent control is a factor or where other issues enter their calculus, their responses to these questions underscore the importance of working with a financial partner with deep local knowledge. Each market has its own idiosyncrasies, and it is important to work with a bank that understands these characteristics — including its rent restrictions — and can offer a number of alternative structures to accommodate them.
In practical terms, the ability to offer options requires a bank to combine regional or national stature with local knowledge. It must be capable of offering a variety of capital sources, including balance sheet, Fannie Mae, Freddie Mac, and FHA financing, and have the scale to provide certainty of execution.
It should also be nimble enough to recalibrate its expectations in the face of market changes. The drive for more affordable housing has hardly run its course, and it is likely that more cities and states will be passing regulations to encourage housing affordability. Inevitably, some of them will be measures that regulate rent.
Evan Williams is SVP and affordable housing specialist at Capital One Multifamily Finance.
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