Policy Points: Rent Control

With the start of the 2024 Washington State legislative session, bills overturning the current state pre-emption to rent control have been brought forward, as well as proposals which would implement state-wide rent control measures.  We strongly oppose any efforts to implement rent control, as well as efforts to overturn the state’s pre-emption.  It is important to take a sober look at why rent control is bad policy.

What is Rent Control?

Rent Control is a broad term used to describe policies, enforced by governments, that limit or cap the price a property owner can charge for a private lease. Typically, rent control is applied to residential units and limits the allowable increase in rent when a private lease is renewed. Less strict versions of rent control allow the property owner to charge market rate rent after a unit has been vacated. Stricter versions of rent control limit rent increases for a given unit in any 12-month period even if the unit has been vacated.

Rent control often goes by many other names including rent stabilization or rent caps. Over the past 50 years, the West Coast, and California in particular, has seen an increase in rent control-type legislation. In 2019, Oregon passed a statewide rent control law that capped increases at 7% plus the consumer price index (CPI) above the existing rent within a 12-month timeframe.

There are sometimes exceptions to these caps built into rent control laws, typically for new construction. For example, Oregon’s 2019 law provides an exemption for the first 15 years of the building’s occupancy. In 2023, Oregon amended their rent control law to impose a 10% cap without an allowance for increases in CPI, creating an even stricter rent control program in the state.

Why do governments believe Rent Control will help?

Rent control sounds great in theory, especially as inflation continues to make the cost of goods and services higher, but it is shown to be disastrous in practice, especially over the long term.  The idea behind these policies is to make housing more affordable by keeping rents down for tenants.  But, because most new construction is exempt from these laws, the purported benefits of this cost control system only extend to people already living in existing buildings.  

If the goal of governments enacting these laws is to ensure affordable housing, they are taking the wrong approach to the problem and in fact may be worsening the issue they are trying to fix. In short, rent control delivers the opposite of its desired outcomes.

What are the effects of Rent Control?

These negative outcomes are mostly twofold: rent control creates an undersupply of housing^{[1], [2]} and a deterioration of existing units^[3].   In a time of shortage and increased demand, adding to the supply of housing is the only viable way to ensure long-term affordability.  Without additional units added to the market, our area will continue to suffer from the housing crisis in which it finds itself.

Rent control restricts supply by decreasing the return on the cost of development.  Without an appropriate risk-adjusted return expected, new housing projects are unlikely to be able to secure financing and begin construction.  By decreasing the supply of new housing, rent control makes housing more expensive for most people over a long-term time horizon.

Without the opportunity to realize returns from significant renovations or capital improvements, most property owners will opt to not proceed with or to delay nonessential property improvements^[4]. Rent control therefore also leads to a lack of investment in building improvements, creating a situation where new development is lessened and the quality of existing development deteriorates. 

A study by EcoNorthwest predicts that implementation of rent control in Washington state could result in a $4 billion decrease in economic activity over the next ten years.

Additionally, the people that tend to benefit from rent control are typically higher-income earners residing in more expensive dwellings^[5].  This dilated benefit for wealthier households has the ability to further exacerbate income disparities.

Why does NAIOPWA oppose Rent Control?

NAIOP Washington State is a non-partisan organization that advocates for responsible development and policies that foster the conduct of the commercial real estate industry.  This includes emphasizing the importance and necessity of adding market rate housing to our region to create affordability and address our housing crisis.

Rent control not only creates the opposite of its intended effects, but it also discourages density and urban development.  In Washington state, a removal of the existing rent control pre-emption would likely lead to some urban centers passing rent control measures, forcing new housing development into the exurban and suburban markets in search of better returns on cost. 

The effects of rent control on the housing creator side of the equation more significantly impact small businesses and mom-and-pop type owner/operators, who are not able to keep pace with rapid escalation of operational expenses. Property taxes, insurance, and maintenance costs have been sharply rising in recent years and will not be capped, even when rent increases are. Small housing providers have fewer resources to cover operational cost increases and capital improvements.

NAIOPWA supports public investment in affordable housing, removing barriers to market rate housing production, and incentive-based programs that encourage mixed-income communities, like the multifamily tax exemption program.

Finally, we believe that any efforts to increase cost to development or stifle growth run counter to creating prosperous, thriving cities.  Market solutions to the housing crisis are not only possible, but the only viable path toward long-term, sustainable affordable housing.

NAIOPWA is a leading voice for commercial real estate advocacy in Washington State. To contribute to our Government Affairs program, visit naiopwa.org/advocacy.