Commercial Real Estate Debt: The Rising Cost of Housing
Real estate investors mull the ramifications of rent control.
Over the last 10 years, the multifamily sector has had an impressive run, with asset prices increasing over 100 percent and cap rates falling nearly 2 percentage points. As multifamily investors evaluate when the current growth cycle for the sector may close, they have another concern beyond the market: rent control initiatives.
Multifamily Sector Asset Prices Have Doubled in 10 Years
Over the last 10 years, the multifamily sector has had an impressive run, with asset prices increasing over 100 percent and cap rates falling nearly 2 percentage points.
Source: Real Capital Analytics. Data as of 4.30.2019. CPPI: Commercial Property Price Index.
Oregon recently became the first state to mandate statewide rent control, capping owners’ ability to increase rents annually at inflation plus 7 percent. California, Maryland, New Jersey, New York, and the District of Columbia all mandate some level of state or local rent restrictions, and industry experts predict that other jurisdictions will follow suit. Although many states have laws that prohibit municipalities from controlling rents (see map, bottom right), there is increasing pressure to address the demand for more affordable housing by restricting investors’ ability to increase market rents.
Demand for More Affordable Housing Is Leading to More Rent Control Legislation
Although many states have laws that prohibit municipalities from controlling rents, there is increasing pressure to address the demand for more affordable housing by restricting investors’ ability to increase market rents.
Source: National Multifamily Housing Council. Data as of 3.13.2019.
In addition to restrictions on increasing rents, some jurisdictions such as New York, which recently made its sweeping rent control provisions permanent, are closing loopholes. In the past, these loopholes allowed a multifamily property owner to bring rents up to market rents when a unit became vacant (vacancy de-control) when the owner invested equity to make improvements to the property, or when a tenant’s income rose to a designated “high-income” level. With these changes, the Real Estate Board of New York predicts that owners will no longer have an incentive to invest in rent-regulated units. With uncertainty around how the new restrictions will impact property values, S&P Global Market Intelligence noted that multifamily loan originations in New York declined by nearly 30 percent year-over-year in early 2019. Access to affordable rental housing has become a rallying cry for a number of the 2020 presidential hopefuls, thus rent control is expected to remain a risk factor for multifamily investors. It is also a mandate that is unlikely to solve the fundamental market disconnect when the demand for housing exceeds the existing supply.
—Jennifer A. Marler, Senior Managing Director; William Bennett, Managing Director; Ted Jung, Director
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.
Brian Smedley, Head of Macroeconomic and Investment Research, discusses major trends likely to shape markets this year.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 09.30.2020 and includes leverage of $14bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.