The Roots of Rent Control

The state of Oregon was the first state to adopt state-wide rent control. Senate Bill 608 was signed into law by the governor at the end of February 2019.

SB 608 limits rent increases at renewal (but not on vacant units) of properties 15+ years old. After residents have lived in a property for 12+ months, rent increases are capped at CPI +7% (Urban West Region CPI). In September, the cap through 2020 was set at 9.9%, down slightly from 2019’s 10.3%. Properties under five units and subsidized housing are excluded from the cap. The bill also provides a more definitive framework for renewals and lease terminations (mitigating evictions without cause).

SB 608 covers the entire state of Oregon, but its impetus came from metro Portland and its impact will be felt primarily here. Portland’s steady economic growth and in-migration since the recession led to housing demand outpacing supply and to rising costs of both multifamily and single-family housing, rising more than wage levels.

Gentrification of many Portland neighborhoods has also led to rising housing costs. This has added financial stress to those needing affordable housing, with many residents without lease protections having to move (likely the major impetus of SB 608).

In general, Oregon’s new rent control legislation is not viewed as particularly onerous or restrictive to the multifamily industry. Yet, as with all rent control laws, the concern is that the current laws could be relatively easily tweaked to become more restrictive thereby more severely curtailing investment and development.

Roots of Rent Control Sentiment – Rising Rents

Through most of the 2010’s, Portland’s economy has expanded significantly, creating healthy employment growth and attracting steady in-migration. Portland’s metro population growth averaged 11% from 2010 to 2018, twice the national rate of 5.8%.

The economic expansion has created jobs, opportunity and financial gains for many Oregonians and Portlanders. The downside has been rising housing costs without necessarily commensurate wage growth. Housing construction has not kept pace with demand (except for high-end multifamily housing), leading to rising rents in multifamily and rising values for single-family homes.

Portland has become a more expensive city than in previous decades. For the resident population that has not enjoyed significant wage increases, rent has risen considerably as a percentage of income. Nearly half (46.2%) of all Portland renter households pay 30% or more of their income on rent. For households making between $35,000 and $70,000 annual income (a proxy for workforce households), 49.5% pay 30% or more of their income on rent (vs. 36.2% for the U.S.).

The roots of rent control sentiment are also found in high multifamily rent growth, particularly in the 2013 to 2015 period which had average annual gains of 8.5%. Since then, rent growth has been more moderate overall, tempered by weaker increases in Class A. Since 2015, however, rent increases have remained high in many Class B and most Class C product due both to value-add renovation work (improving the product) as well as supply/demand economics.

Roots of Rent Control Sentiment – Single-Family

The rise of single-family home prices has contributed to housing unaffordability. FHFA’s Home Sales Price Index shows considerable appreciation in both Portland and Oregon since 2011 when home prices bottomed out. The increases have been favorable for creating equity for homeowners, but they have also added to the challenges of buying a home.

From 2011 to Q2 2019, Portland’s index rose 87.0% (9.3% annual). Oregon’s increased 82.5% (7.8% per year), also well above the U.S.’s 53.4% (5.5% per year). In the past two years, gains have moderated: Portland 5.0% per year and Oregon 6.1% (U.S. 5.9%).

Impact of Rent Control

Rent control legislation typically impacts a market in five principal and related ways: investor sentiment, investment volume, asset pricing, development activity and “contagion.” It is too early to fully judge the impacts from SB 608. For that matter, fully separating rent control’s impact from other policy and economic influences is not possible. Still, it may be possible to observe some impact in the Oregon multifamily landscape, particularly in Portland.

Investor sentiment. CBRE capital markets professionals indicate that both local and national investor interest in the Portland multifamily market remains healthy and only diminished at the margins (a few investors prefer markets without rent control). At the moment, for investor interest, Portland’s generally favorable market fundamentals seem to be outweighing dampening effects from SB 608.

Investment volume. Acquisitions of multifamily product has moderated since peaking in Q3 2018. The slowdown is more apparent in the older property, although the decline in sales is also likely attributable to limited product availability. It is still too early to fully judge rent control’s impact.

Asset pricing. Rent control could lead to higher cap rates and lower property values, but there is no evidence yet. CBRE’s H1 2019 North American Cap Rate Survey revealed stable cap rates for stabilized Class A and B assets (infill and suburban). The survey revealed a slight rise for Class C infill assets from H2 2018, but a slight drop for suburban. Returns on cost for Class C infill assets inched up slightly.

Real Capital Analytics data reflected a decrease in average cap rate from Q2 to Q3 (to 5.1%). The decrease occurred in sales of older assets as well as all properties. The drop could mean that investors are not concerned about rent control or it could be a reflection of the specific assets traded in the most recent quarter. Time will provide more clarity.

Development. Longer term, rent control measures typically serve as a disincentive for development, even when new properties are not subject to rent control. Starts seem to be trending down, but permits are higher this year compared to last; the data does not provide a clear picture on construction momentum. Since, the planning and entitlement period for most developments permitted or started in the post-SB 608 period would have occurred prior to the Bill being passed, it is too soon to make any conclusion on development impact.

Contagion. While Oregon was the first state to adopt state-wide rent control, the legislation was influenced by California. Policy makers and tenants groups across the U.S. are closely watching Oregon’s rent control impacts. The largest influence may be on Washington State.

Other Public Policies of Note

Upzoning. House Bill 2001 was passed in July 2019. It requires Oregon cities (25,000+ population or within a metro) to allow duplexes, fourplexes and related higher-density housing in land zoned single-family within urban growth boundaries. Cities of 10,000+ population are required to allow duplexes on land with single-family zoning. The bill’s objective is to allow for higher densities and thereby increase housing volume, especially affordable housing.

Annual Fee. In August 2019, the City of Portland approved an annual $60 fee per apartment unit. Subsidized housing is exempt. The fees will support the city’s Renter Services Office.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.