Rent Control Rears its Ugly Head, Again

It didn’t take long for rent control to rear its ugly head again and this time it’s in the State of Oregon, Many of you will remember the scare in California last fall with the potential repeal of the 1995, Costa-Hawkins Rental Housing Act (CHRHA) that was on the November ballot. The CHRHA is a 1995 state statute that limits the use of rent control in California and provides that cities cannot enact rent control on (a) housing first occupied or built after February 1, 1995, and (b) housing units where the title is separate from connected units, such as condominiums and townhouses. CHRHA also provides that landlords have a right to increase rent prices to market rates when a tenant moves out and this is called “vacancy de-control.” Prior to the enactment of CHRHA, local governments were permitted to enact rent control, provided that landlords would receive just and reasonable returns on their rental properties.

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Voters in California handily defeated the repeal of CHRHA, and landlords breathed a big sigh of relief. However, rent control legislation is not going away and the State of Oregon in May of this year approved a statewide rent control law, the first in the country. The new law caps rent hikes at the annual increase in the consumer price index (CPI) plus seven percent. For the remainder of 2019, the maximum rent increase has been calculated by the state at 10.3%. The rent control measure does not apply to buildings that are less than 15 years old or to government-subsidized units. The new Oregon law also bans evictions without cause and allows rents to rise to market when a unit is vacated, which, as explained above, is called vacancy de-control.

As an apartment owner in Oregon, you may think that this is not a big deal and can live with a maximum annual rent increase of the CPI plus 7%. The problem is, this is just the first step. Once a state establishes a statewide rent control law, the politicians in that state (especially liberal ones) will expand the law over time, especially before elections, to gain favor with voters and get reelected. I can see the headlines in Oregon now before the 2020 elections, “Our voters are still being hurt by high and increasing rents and are having a hard time making ends meet. Therefore, we want to expand rent control to all properties and reduce the annual increase from 7% to 5%.”

The other problem is that other states, again the most liberal ones, will begin to copy the Oregon law and rent control will begin spreading around the country. We expect California to again place on the 2020 ballot, a proposition to repeal or rewrite the CHRHA. The state of New York, this week, approved bills to strengthen and reform its 1943 rent control laws. The new laws, when signed by the Governor of New York will do the following; make rent laws permanent, allow any municipality in the State of New York to set up a rent control system that exists in New York City, vacancy decontrol (ability to raise rent to market with a vacant unit) will be repealed and eliminate the ability of landlords to increase rent by up to 20% when an apartment becomes vacant. We here at VOM expect California, New York, Maryland, Illinois and New Jersey to enact some type of rent control legislation by the end of 2020, with some of the measures on the November 2020 ballot. As this legislation expands and becomes more draconian, apartment owners will begin to shift capital to states without rent control.

Rent control, in general, is a very destructive system to the rental market. It significantly curtails new construction and development and the continued refurbishment of existing units and increases the rent on existing buildings. Rent control ends up hurting lower and moderate-income tenants, the same people that the politicians are trying to help.

Joseph Ori is Executive Managing Director of Paramount Capital Corp. The views expressed here are the author’s own and not that of ALM’s real estate media group.