Limiting Rent Increases. Concerned?
Lost in the news cycle over the last two weeks was the announcement from the White House on July 16th that the President is “taking action to lower housing costs” by limiting rent increases, among a few ideas put forth. Unequivocally, almost all real estate investors, bankers, and participants I have read or spoken to in the last week have come out against this, but I don’t get the sense the CRE community is as worried as they should be. “The courts will throw this out quickly; it won’t ever get through Congress; lame duck President; trying to buy votes,” and the list goes on. The news was also brushed under the rug as quickly as the White House floated it. If you aren’t taking it seriously, here are my reasons why you should be.
First – The government already showed its hand once here, and what that playbook could look like through the mechanism of an eviction moratorium issued by the CDC that took two years for the courts to shoot down. The Center for Disease Control and Prevention (CDC) – which claims to be the nation’s leading science-based, data-driven, service organization that protects the public’s health – told tenants nationwide not to worry about paying their rent for effectively two years. Depending on where you are in the country, some apartment owners still deal with the repercussions of this failed policy.
Second – The politics of rent control is suitable for both parties because it plays to the populist base. Remember, populism knows no political party but rather an “us versus them” mentality or the “morally good masses” against the corrupt and self-serving “elite.” For example, tariffs started under Trump and were kept in place by Biden. This idea – rent control – was proposed by Biden, but I could very quickly see this gaining steam under a Trump administration (who enacted the eviction moratorium originally). Trump’s selection of JD Vance as his running mate is a nod to the new-age republican party’s beliefs in economic populism. More spending on industry and manufacturing, pro-labor, increased federal minimum wage, anti-trust, and anti-big business. The lines are starting to get blurry here. Remember this as well, Trump has changed his party affiliation five times since 1987. Nothing should be a surprise with Trump, especially if he doesn’t need to run for re-election. Finally, don’t be surprised if the current administration enacts this through an executive order right before the election cycle heats up to drive momentum with their base.
Third – The mechanism will be through Fannie and Freddie, as it will be the easiest to implement through tweaking their loan documents. Fannie and Freddie financed over $100B of multifamily properties last year, roughly 38.5% of all apartment financing. That was both a down year for the agencies and the apartment sector, as well. Put another way, the government finances 2 out of every 5 apartments in the US. It wasn’t always that way, though, as their market share has been steadily growing since the GFC (odd that affordability has been getting worse since then.) Further, suppose you were to dive into Freddie’s portfolio for example. In that case, 3 of the top 5 states in their portfolio in terms of outstanding loan balances already have rent control on a state level or have it in specific major metro markets (CA; NY – NYC; NJ – Jersey City, Newark). It wouldn’t be that hard of a pill to swallow in those states, as they are already accustomed to it. It would affect their business in the number 2 and 4 states, Texas and Florida, but I would venture not by nearly as much as people think. After all, in most markets throughout the US, Fannie and Freddie are usually the only two lenders competing to win the business. Their terms are far and away better than anything the banks can offer in those markets, which are typically their only competition. As I see this working out, investors will either have the option to take the financial terms of a Fannie and Freddie loan with the rent caps or find alternative financing options.
On the other hand, I could be completely wrong. One thing is for sure: the single most significant tail risk not priced into the multifamily sector right now is government policy, and what better way to implement it than through the financing mechanisms they control.
John Darrow
Principal / Managing Director
O: 214.717.6301
john.darrow@slatt.com