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Oregon Rent Control Law Worries Multifamily Sector Experts

While the law still allows for healthy rent increases and excludes new construction, experts worry it might one day be expanded.

A new rent control law recently passed by the state of Oregon may be just the beginning of a trend. In several other states and cities, advocates are calling for new rent control regulations.

Real estate experts say that Oregon’s new law is relatively limited in scope. It allows rents to increase fairly quickly and does not immediately affect new construction. However, many still worry that Oregon’s laws will become more restrictive over time.

“Once they have the law in place it is very easy for future lawmakers to simply decrease the amount that you can raise your rents,” says John Sebree, Chicago-based director of the national multi housing group with brokerage firm Marcus & Millichap.

Oregon’s law is reasonable, but may not stay that way forever

In February, legislators in Oregon voted to adopt rent control statewide. “The Oregon legislature wrote the regulations in a way that would minimize objections from those in the real estate industry,” says Greg Willett, chief economist with RealPage Inc., a provider of property management software and services.

The law limits the annual amount by which property managers can raise rents for existing tenants to the local rate plus 7.0 percent. In 2019, that translates to an increase of 10.3 percent, according to an analysis by Real Page.

“While there might be times when a landlord could justify pushing renewal lease rents more than 10 percent, that would be unusual,” says Willett. “Even when rent growth in Portland peaked for this cycle in 2015, the average renewal lease price increase was around 9 percent, still under the level allowed in this legislation.”

Apartment rents grew by an average of about 1.5 percent at class-A buildings in Portland over the last year, according to RealPage. “Price growth slowed due to an increase in new product deliveries,” says Willett. For class-B and -C properties, average renewal lease rent growth is between 4.0 and 5.0 percent, only half allowable levels. Also, owners and operators can set the rents for vacant apartments at market-rate levels, just as they have historically.

However, Oregon lawmakers could eventual make the regulations tougher, according to Willett. “Today’s allowable rent increases of inflation plus 7 percent could be revisited over and over, eventually taking the size of rent boosts down to levels that don’t at all make financial sense,” he says.

The law spares new development

Apartment developers often argue that rent control laws discourage them from building new apartments. That would increase the shortage of housing, driving the price of housing even higher. “There is a need for more housing,” says Sebree. “This issue is going to get worse. Household growth is going to outpace the supply of new housing.”

The law in Oregon, however, will not apply to new apartments until those apartments are 15 years old. “We won’t know for a while whether or not developers and capital sources actually are willing to build under the new regulations,” says Willett. “But at least there’s an effort from the lawmakers to keep construction going… However, some multifamily sector investors simply could choose to avoid Oregon, instead directing their capital to places where rent control isn’t part of the discussion now.”

Other cities and states consider new regulations

In cities and states across the country, activists are working hard to create new rent control laws.

However, for now, 47 states have laws that explicitly prevent local governments from passing new rent control regulations. A ballot initiative to remove one of these state laws recently failed in California. “Proposition 10” would have repealed California’s Costa Hawkins Rental Housing Act, passed in 1995, which imposes sharp limits on the ability of local governments to create new rent control laws. Voters rejected it by nearly two-to-one (62 percent to 38 percent) on November 6, 2018.

Advocates for rent control vow to keep fighting in states including Illinois, Washington and Colorado.

“Authorities in other states and municipalities, plus renter advocacy groups, certainly will watch what happens in Oregon to see what happens with the housing market and the overall economy during the near term,” says Willett.

TAGS: Leasing News
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