29 states have enacted multifamily regulations since 2021. Where do we go from here?

Prices go up in NY = more regulations in NY

Earlier in August, Kingston, NY became the first municipality in upstate NY to pass rent controls. This was made by possible by 2019’s HSTPA. The beefed-up rent regulations tweaked the rules to allow rent stabilization to be created in any city in NY state, so long as the vacancy rate in the city was less than 5%, otherwise called a housing emergency. Out of 1,200 units that were surveyed in April and May of this year only about 20 apartments were found vacant in Kingston, yielding a vacancy rate of 1.57%. With that in mind, the local council voted overwhelmingly 7-1 to pass rent stabilization.

Key Question: Is rent stabilization a self-fulfilling prophecy? Once instilled, does it ensure vacancy remains low, and then require the continuation of a housing emergency to perpetuate lower rents?

The ruling in Kingston was a shock to some, but it shouldn’t be. Kingston was part of a group of other NY cities that passed Good Cause earlier this year – a ruling which forces owners to renew leases to all tenants, save for a few government-sanctioned reasons not to. The local city council in Kingston has demonstrated its interest in limiting owners’ property rights in favor of tenant protections. Rochester, NY on the other hand, has rejected Good Cause and it has rejected the idea of cozying up with rent stabilization. However, tenant advocates are asking the city to perform a redo of the housing survey in which vacancy % in the city is determined – they claimed that too many owners with high occupancy didn’t respond to the survey. It’s very possible that by summer of 2023 Rochester also passes rent stabilization.

Relocations outside NY = prices go up outside NY

Why are these tussles over property rights happening? Are elected officials arbitrarily enacting these laws? Rent growth, housing prices, and mortgage rates have ballooned in the post covid era and this has been a heavy burden to carry for those who do not already own property. Some tidbits of housing data paint a damning image for housing affordability nationwide:

• New York, NY: Manhattan and Brooklyn tenants pay >50% of their gross incomes towards rent.

• Boise, ID: home prices are 72% higher than what median incomes in the area can afford.

• Grand Prairie, (Dallas) TX: rent has increased 26.4% YOY from August 2021.

• Kingston, NY: property prices for buyers increased 30% in 2021, the greatest single year increase in the area in the last 25 years.

The rapidly growing rents and the difficulty that poses to tenants and home buyers goes beyond Manhattan and NYC.  Higher costs of housing in Idaho and Texas speak to the strength of these markets. For Boise homes to be so costly compared to what residents’ median incomes are, indicates that the demand for housing outside NY is strong. That’s not to say NYers aren’t making more local moves as well. Searches for Brownsville Brooklyn apartments for rent on StreetEasy rose a whopping 49% YOY, showcasing a need for prospective residents to find cheaper housing away from Manhattan’s core.

Getting priced out of Manhattan leaves just about anywhere else in the U.S to go and find cheaper housing. This is good for investors because it means markets outside of NY will see higher rent growth due to increased demand for rental housing that would have otherwise gone to NY when housing was more affordable, and jobs required 100% in-person work.

Prices go up outside of NY = more regulations outside of NY

The wave of regulations that I predicted would pass across the country is beginning to take shape. There are a whopping 29 states that have passed tenant protections since January 2021. Though many of these were due to Covid, much of these rules have outlasted the pandemic. Below is a sample of these initiatives:

• Boulder, CO: Tax multifamily owners $75 per rented unit. Use the proceeds to ensure tenants can afford legal representation in landlord/tenant court cases.

• Baltimore, MD:  Good Cause eviction – owners must renew tenant leases.

• St. Paul, MN: 3% cap on annual rent increases.

• Portland, OR: Landlords must pay for re-locations fees if they evict / fail to renew tenant leases.

Key Question: Is rent control a necessity or a choice once a certain level of market maturity is reached, and residential rents reach a certain level?

Rent protections for tenants have proliferated across the U.S with varying degrees of intensity – so how do you invest somewhere and still make profits?  One of the first things to think about, now more than ever will be: government’s involvement in housing. You will have to take a stance on how you believe rent regulations will develop over time in different markets. The National Multifamily Housing Council (NMHC) offers a great tool to understand the maturity / nascence of rent regulations across states: linked here and see below.

Buying a property is a long-term commitment and thinking about those tenant / government relations upfront will save you a lot of headaches down the line.  Here are a few perspectives you can consider adopting as you begin to think about deploying capital in this new post-covid world:

1. Rent regulations are tricky, but there are plenty of markets where they don’t exist, where they won’t be present for a long time.

   I will focus my buying efforts on red states with few or no rental regulations.

2. Rent regulations are proliferating in new markets. It’s very likely that a market I buy in now will have rent regulations in the future.

   My base case on yearly rent growth needs to be marked down

3. Since rent regulations will eventually be ubiquitous, maybe it’s best to stick to markets where those tenant protections are already baked into the fabric of the city. Using NYC as an example, because the most recent overhaul to rent regulations happened 3 years ago, playbooks have emerged that leverage loopholes the regulations have left open to maximize profits.

   I will invest in markets where the rent regulations have reached maturity and where there is higher levels of predictability and a smaller probability of change in the regulatory environment.

Taking a position on the development of rent regulations is akin to predicting how different geographies grapple with socio-political issues of today. There are some incorrect premises, but there may be several directionally correct ideas. As the U.S. continues its fight with inflation, rent regulations will broaden and deepen in big cities, and perhaps even towns. This means jurisdictions will have a greater degree of differentiation one from another as they develop their own nuanced systems for coping and growing. Consequently, investment theses that consider rent regulations more heavily will likely do better. And that means local experts will become even more crucial than before to help investors navigate unique landscapes and capture profits.

I am commercial real estate sales broker at Greysteel, where I specialize in originating of multifamily sales and debt transactions in NYC. To discuss the contents posted here feel free to reach out to me at rsinclair2015@gmail.com or rsinclair@greysteel.com for NY specific deal flow.