Last modified on December 13th, 2019
By Megan Eales Monroe
Rent control is a controversial topic in the real estate world, since market changes in this area can have a dramatic impact on both investment and property management businesses.
With recent changes in California and Oregon law, several states now have state-wide rent control regulations. Some states, such as New York, have new jurisdictions with rent control rules in place, while others follow the Dillon rule, which means that cities or districts may implement rent control measures, but they must get approval from the state prior to adopting specific rules.
To shed some light on how rent control adoption and other market trends may affect your property management or real estate investment business in the coming year, JC Castillo (Multifamily Property Group) and Paul Peebles (Old Capital Lending) recently invited AppFolio’s Senior Vice President Nat Kunes to discuss the impact new regulations may have on property management and investment firms in 2020.
Here are a few takeaways from their discussion on the Apartment Investor Show podcast.
Regulations May Pressure Owners and Property Managers to Keep up With Rent Increase Caps
Kunes explained how the statewide adoption of rent control will present new challenges for property managers who operate in California. He suggested that apartment managers in cities like San Francisco where rental inventory is tight almost feel compelled to increase rates 3-5 percent each year – the maximum allowed – because they fear never being able to catch up if a long-term resident decides to vacate rather than renew. California’s new rent control regulation mandates a maximum rent increase of 5 percent plus inflation annually.
Rent control is complicated, and often directly tied to the consumer price index (CPI), which varies. Cost containment measures establish a range of allowable increase percentages called “caps.” To be in compliance and avoid sanctions, property managers must make sure they do not exceed the allowable increase during lease renewal processes.
Some cities average the CPI for 12 months to establish a rent increase cap for the year, others may use a percentage of the current inflation rate – Santa Monica and West Hollywood use 75 percent as the basis for setting the cap, or maximum.
According to Kunes, some states have tried to prevent property managers from raising rents to match the yearly maximum increase allowed. Although these states have attempted to provide flexibility to adjust rental rates more realistically with new leases, these provisions are not all that effective in many cases.
The primary challenge for property management firms may be balancing rent rates with long-term tenant expectations and changing market conditions.
The Need for Affordable Rental Housing is Growing
In states such as Oregon, Florida and California, where many renters spend more than a third of their monthly income on housing, weighing the advantages and disadvantages of rent control against affordable housing needs is complex.
According to the National Low Income Housing Coalition, the U.S. has a national shortage of affordable units — with more than 7 million units needed to house those with incomes at or below the poverty level. Even for renters above the poverty level, there are a significant number of rent-burdened households in the U.S. According to U.S. Census data reported by Apartment List, nearly 25% of all U.S. households are severely rent-burdened, meaning they spend at least half their monthly income on rent. An additional quarter spends more than a third of income on rent. Overall, of 49.7% of all renters in the U.S. are rent burdened.
These pressures have contributed to the legislation of many new rent control measures, although there is much disagreement over the potential impact these restrictions will have.
Either way, there is a clear need for the construction of additional affordable housing units. Though construction is at an all time high, the market is still not keeping up with demand. This may create an opportunity for multifamily property managers and investors to grow their portfolios in this area.
However, increasing administrative burdens for rent control compliance could disincentivize investment in new affordable rental housing. For example, we may see investors convert apartment homes to condos, which could negatively impact rental supply.
Interestingly, despite high demand, rent growth has been restrained. Nat shared that although occupancy rates hit 96% in August this year, there has been only a modest 3% rent increase this year across the board. This may be another reflection of the growing need for affordability across the U.S.
Tech Solutions Can Prepare Your Business to Thrive Despite Market Changes
As rent control expands, experienced property management firms know they need to be agile today to stay competitive. The key to thriving in today’s real estate landscape is being prepared and fully able to adapt quickly to market changes.
This is where technology can help. Purpose-built property management solutions enable managers to efficiently track and regulate against specific rent control factors, such as tracking the date of the last rent increase, so that scheduled rent changes are always in compliance with state and local laws. Since the software can handle these complicated formulas, there is little chance of human error.
Software that captures data on rental applications, vacancy numbers, price tiers, rent growth, and other trends empowers decision-makers to identify patterns and respond to emerging trends quickly and efficiently. These tools also ensure that property management teams have the knowledge and data needed to remain in compliance with regulations, stay competitive in the marketplace and exceed their financial goals. Additionally, it’s important that this software should support a diversified portfolio to enable your business to maintain stability in a changing market.
Finally, investing in a technology partnership with a provider who constantly innovates is key to meeting the rapidly changing demands of the market.
For more information on rent control and other trends that will shape real estate markets in 2020, check out the video of Nat Kunes’ appearance on the Apartment Investor Show.
Where does one find the inflation index? Is there an agreed upon statistic by all cities?
Megan Eales Monroe
Hi Frank – the Consumer Price Index (CPI) is used as a measure for inflation. It’s reported monthly by the Bureau of Labor Statistics. Here’s a helpful article: https://www.investopedia.com/terms/c/consumerpriceindex.asp
The State of California also publishes a CPI index here: https://www.dir.ca.gov/OPRL/CAPriceIndex.htm