With three states – Oregon, California, and New York – adopting statewide rent control laws, the value of multi-family properties are already beginning to feel the effects. 

In Oregon, where rent increases are capped at 7% (plus inflation) annually, approaches to valuing a property are swiftly changing. While in many cases managers minimally increase rent each year – aiming to keep their tenants and avoid turnover expenses and vacancy loss – the problem lies when a property owner decides to sell or refinance.

Prior to the passing of SB 608, the common practice was to price properties based on rents. In a seller’s market, buyers are ready and willing to pay top dollar for what is technically a hypothetical rental income stream. Therefore, the buyer’s job is to increase rents as quickly as possible to get that cash flow. If the rental income is already near market levels, then the property can be valued based on actual income, rather than hypothetical.

However, if rents are below market value, rent control will make valuing the property a much longer and more challenging process. This is already having a negative impact on the value of underperforming properties. Buyers are simply unwilling to purchase properties if the target rents will not be achieved within the first 1 or 2 years.

In Oregon, brokers are taking a new approach to pricing, basing it off the income produced after the initial round of rent increases. However, since the rental increase is capped at 7%, if a property is trailing the market by more than that, it is difficult to maximize the appraised value in the event of a sale or refinance. This is a major contributing factor to the decline of property values. 

There is also an influx of properties being listed, since some owners simply don’t want to deal with the new laws. Others are repositioning their portfolios, opting for a 1031 Exchange. This places a downward pressure on pricing.

Adding to this, cap rates are rising in New York, California and Oregon, since investors want higher returns for their now more risky investment. If they are paying higher prices up front, and the opportunity for future growth is declining, then they want something extra.

The sad irony of lawmakers’ attempts to help create affordable housing is that in the long run, tenants will once again get the short end of the stick.

For example, with the increased difficulties valuing properties affecting refinancing potential, property owners are less likely to make property improvements, especially if they know they won’t get a higher return on their investment.

Additionally, historical data shows that rent control slows development, therefore creating a shortage. While less competition is good for investors, an artificially low inventory will actually drive rents higher in the long term. And, as long as there is a demand for property, prices will rise, in turn continuing the difficulties for renters to find apartments they can afford. 

Given all of this information, it seems that while the intentions of lawmakers to look out for tenant rights, the approach of blanket rent caps are proving to negatively affect both property owners and tenants.