Affordability, Rent Control Challenge Multifamily Sector

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LOS ANGELES—No matter where the cycle is, multifamily has been a consistently high-performing asset within commercial real estate. Now, though, it is facing twin challenges that could cause some investors to rethink this sector’s fundamentals.

“Some of the biggest challenges facing the multifamily industry right now are affordability and regulation,” says Noah Hochman, Co-Chief Investment Officer & Head of Capital Markets, TruAmerica Multifamily, LLC.

Affordability

Affordability has been a long-brewing problem that is reaching a tipping point. A recent Freddie Mac survey, “Profile of Today’s Renter and Owner” shows that more than 50% of Americans make housing or spending changes to afford their rent. For the younger generations, child care and student loans costs are important factors affecting housing decisions. The survey also found that 44% of renters who had trouble affording their rent over the last two years reported having to move to afford housing costs. In addition, over 50% of essential workforce employees such as nurses, police officers and teachers, have made housing decisions with their student loan repayment obligations in mind.

Rent Control

As a result, rent control is fast coming another challenge facing the multifamily industry.

According to the latest study by the Urban Institute, out of 89,000 municipalities, only 182 municipalities have rent control regulations, most of which are located in California, New York, Washington, DC, New Jersey, or Maryland. Meanwhile 37 states actually have laws that prevent local governments from enacting rent control measures.

Rent regulation, however, has recently been revived especially in cities and states where a housing affordability crisis, for the elderly on fixed incomes or moderate-income residents, exists. Oregon, for example, is the first state to enact a statewide rent control law which restricts annual rent increases to 7% plus the increase in the consumer price index. California is on course to follow suit with its own rule.

“With rent control, investment in new multifamily/rental housing essentially screeches to a halt,” comments Hochman. “Rent control also drastically lessens the supply of decent housing since landlords would rather convert a building to commercial use or to condos than abide by a law that limits their profits. Lastly, rent control serves as a disincentive to maintain and/or improve a property, because the return in Investment doesn’t exist.”

How will heightened rent control laws play out in multifamily’s longer-term forecasts? It is hard to say now but it is clear that despite positive market fundamentals, new regulations could cause some apartment stocks to underperform.