PREA: a new wave of residential rent control

Apartment investors sort through a new web of rules and prepare to be surprised again in 2020.

Apartment rent control initiatives surged in 2019, propelled by a combination of falling affordability in the most productive—and expensive—cities and in part by greater polarization in the policy views of legislators and voters. The strength of recent momentum toward stricter rent control policies took many by surprise, especially after California voters had defeated a ballot measure in November 2018 that would have allowed cities there to broaden their rent regulations. The share of US apartments subject to some form of rent control has been trending lower since the 1980s, but three major 2019 laws sharply reversed that pattern.

In February 2019, Oregon enacted the country’s first statewide apartment rent growth regulations. In June, New York became the second jurisdiction to pass statewide rent regulation. California then enacted new state rent regulations in October. Increased regulation of rent growth has been proposed in half a dozen additional states, from Massachusetts to Washington. And this trend is not isolated to the US: Berlin’s state government enacted a five-year rent freeze in June, sending German listed residential company share prices tumbling.

The flurry of activity on rent regulation raises questions for US apartment investors: How concerned should they be about negative impacts to cash flows and values for assets in their portfolios? How do the new laws change the risk-return profile of future apartment investments? And how will the new laws affect local apartment market dynamics?