Commercial Investment Real Estate Spring 2020 | Page 8

By Nicholas Leider
UNDER CONTROL
Rent control is a hot topic in the multifamily sector, but regulation
might lead to counterproductive unintended consequences.
L
ast year, California and Oregon became
the first two states to pass rent control
legislation. New York has regulated the
rental market for decades, with a new state-
wide bill the latest in a line of state and local
ordinances popping up since World War II. The
goals of such actions — maintaining affordable
housing, minimizing displacement, and dis-
couraging gentrification — are commendable.
But the implications of rent control
can be self-defeating. A 2019 study by Stan-
ford University economists found such
measures in San Francisco limited mobility
by 20 percent and reduced investment in
properties by 15 percent. It also stated, “the
lost rental housing supply likely drove up
market rents in the long run, ultimately un-
dermining the goals of the law.”
For our February episode of the Com-
mercial Investment Real Estate podcast se-
ries, we spoke with Spencer Levy, chairman
of Americas research and senior economic
advisor for CBRE. Levy delved into the issues
and implications surrounding rent control,
what CRE professionals can do in response
to such regulations, and how development
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
can limit rent increases by supplying more
affordable housing.
CIRE: CITIES ACROSS THE COUNTRY
HAVE BEEN IMPLEMENTING DIFFERENT
STRATEGIES TO CONTROL RISING RENTS,
SO WE WANT TO EXAMINE THE CURRENT
AND FUTURE IMPLICATIONS FOR COM-
MERCIAL REAL ESTATE PROFESSIONALS.
COULD YOU GIVE US A QUICK HISTORY
OF HOW WE GOT HERE, WHERE RENT
CONTROL MEASURES ARE HOT TOPICS IN
MANY URBAN AREAS?
SPENCER LEVY: We’ve been
studying rent control now
going back over 100 years,
starting in London. Quite
candidly, when rent control
first became an issue a cen-
tury ago, there were many
more rental units than there
are today. We have found
that rent control — while
certainly it is coming from
the right place in terms of
intention and trying to do
the right thing — ends up
being self-destructive in
terms of eliminating addi-
tional supply. We also see it
crimping the capital flows
into existing units, to the
extent that you are limited
in the amount you’re able to raise rents even
if there is a new capex. We’ve arrived at this
point because of an affordable housing cri-
sis, but rent control is a solution that’s being
offered that I think is more destructive than
constructive. The most constructive solutions
are those that increase supply — not those
that decrease capital flows.
CIRE: IN PLACES LIKE NEW YORK AND
SAN FRANCISCO, WHERE RENT CONTROL
IS A REALITY, HOW CAN DEVELOPERS
AND INVESTORS INCORPORATE THESE
REGULATIONS IN PROJECTIONS FOR
COSTS AND REVENUES?
LEVY: Well, that’s really the biggest risk fac-
tor from an investor’s or developer’s view —
the uncertainty of what’s coming next. How
much more are they going to restrict my abil-
ity to take a unit to market rate pricing? How
are they going to restrict my ability to make
capital improvements to the building and be
able to pass that along to both investors and
tenants? The best thing a developer can do is
be very politically aware, be politically savvy
of what’s happening on the ground, and do
their best to underwrite it. Some places have
seen a restriction in capital flows, in part due
to these rent controls, which have material-
ly changed the dynamic of the marketplace.
That could create opportunity for some folks
who see through these issues, but for many,
it has caused them to pull back on capital in
some of the more restrictive markets.
CIRE: IF LEGISLATION AND REGULATION
AREN’T THE ANSWER, WHAT CAN THE
CRE INDUSTRY DO TO CONTROL
INCREASING RENTS?
LEVY: I’m going to give a shoutout to Minne-
apolis, if I can. Why Minneapolis? Well, not
because I was there three weeks ago and had a
great time with some terrific people. I’m giving
Minneapolis a shoutout because they did what
I consider to be the most constructive solution
to this problem, one that I would like to see
implemented all over, which is they changed
their zoning laws withing city limits. In sin-
gle-family areas, you’re now able to go upward
several floors to create more vertical density.
This is precisely the type of solution that they
tried to do in California, but it was shot down
by the state legislature when they were trying
to do it near transit-oriented developments
in suburban areas. In the absence of going
vertical, you’re going to see more suburban
SPRING 2020