Main Takeaway: As we look to expand the housing supply in North America, there is a tension between enabling developers and protecting tenants from rising rents. Although multifamily owners and investors may need to navigate increased attention on rent control measures, they will see tailwinds in de-regulation on the construction and zoning front.
Story: Regulations are the bane of existence for many real estate developers. Designed with the warm and fuzzy intention of protecting tenants and addressing the housing crisis, these additional roadblocks and costs have morphed into a series of unfortunate events for developers. Let’s look at the latest real estate development regulations and the current political climate for real estate watchers.
Cost of Regulation
The National Association of Home Builders (NAHB) dropped a bombshell report last year showing that regulations account for a whopping 40.6% of apartment development costs.
To add insult to injury, another NAHB report reveals that regulatory costs add a staggering $93,870 to new home prices. It’s almost like paying for a luxury car, but you can build an affordable home instead of driving off the lot.
And this is no different for multifamily developers. You can see why many aren’t clamoring to bring new supply to the market. The double whammy for developers now that interest rates are high is that they not only spend a large portion of funds on regulatory requirements, but now the cost of debt has sometimes doubled or tripled.
This is partly why many jurisdictions focus on de-regulatory measures such as upzoning, reducing development fees, and fast-tracking permitting processes. Here are just a few headlines that make NIMBYs everywhere cringe and offer a glimpse into the tailwinds that will help multifamily developers pencil in more construction projects in the medium term.
…And the list goes on. The idea is that urban and suburban communities need to build up, not out.
These initiatives should be applauded and encouraged, and more policy-makers across both political spectrums are wising up to the fact that regulatory reach is hindering housing development and ultimately pushing up prices for their citizenry.
Rent Control: A Tragicomedy
Although the regulatory environment could prove positive for developers over the coming years, increasing rent control measures could present challenges. Rent control has sparked more debate across America than whether pineapple belongs on pizza. For the record, it doesn’t!
It’s like the plot of a tragicomedy: designed to shield tenants from sky-high rent increases, but instead, it’s serving up a cocktail of headaches for real estate developers. This ultimately puts downward pressure on new supply as developers avoid rent-controlled areas, leading to…you guessed it…higher rents!
Mary Salmonsen of Multifamily Dive highlights the increased pressure on rent control measures nationwide. In light of the rapid increase in rent over recent years, over 20 states and numerous municipalities are contemplating introducing rent control measures. In fact, the National Apartment Association is currently monitoring over 190 bills associated with rent control.
In the past few years, such initiatives have deterred new construction in the regions where they’ve been implemented, like St. Paul, Minnesota. As a result, landlords have either withdrawn housing units or delayed maintenance.
But some of these measures are counterproductive as they disincentivize apartment owners from spending money on assets or building in these areas. A recent report from NYC shows that thousands of the city’s rent-stabilized apartments are actually empty. A document released by NYC’s Independent Budget Office says that over 13,000 apartments sat vacant for two years between 2021 and 2022. According to a recent WSJ piece highlighting the potential vulnerable legal grounds upon which rent control measures exist:
New York’s rent-stabilization scheme is at heart a public-welfare program. It may be a worthy one. But it uses private property for a public purpose. The Constitution therefore requires its cost to be borne by the general public, whether through a tax benefit or some equivalent compensation applicable to all affected buildings.
Two landlord groups, in particular, are pushing back on NYC’s measures, attempting to bring it back to the hands of the Supreme Court.
It’s time policymakers put on their thinking caps, weigh the pros and cons, and consider alternative approaches that don’t involve hamstringing real estate developers. Spoiler alert: Protecting tenants and ensuring affordable housing without creating a regulatory nightmare is possible. You just need to promote the supply side of the equation rather than limiting it.
But that’s a story for the next issue!
Expert Take on Multifamily Regulations
“This study illustrates how overregulation is exacerbating the nation’s housing affordability crisis and that policymakers need to take bold steps to reduce or eliminate unnecessary regulations that will help builders increase the production of quality, affordable housing to meet growing market demand.” — NAHB Chairman Chuck Fowke