By Adam Pagnucco.
You can run, you can run, tell my friend Willie Brown
That I got the crossroad blues this mornin’, Lord, baby, I’m sinkin’ down.
– Robert Johnson
In the wake of multiple tax hikes, many legislative mandates and the passage of rent control, Montgomery County’s real estate industry is at a crossroads. That’s a big deal since this industry supplies more tax and fee revenue to the county government than any other single industry. If it collapses, that will cause a revenue crisis for the county, potentially huge costs for taxpayers and a worsening shortage of housing.
What will happen now?
To answer that question, I consulted my source network and BOY did I hear a mouthful. Following are the comments of folks who are directly engaged in the businesses of owning, managing, developing and/or financing real estate. I asked them two questions and their answers will form the basis of most of this series.
Question 1: What will be the impact of the new rent control law on future development of rental housing and on housing supply in general?
Source 1
Result will be negative.
Source 2
Investment in new rental housing will slow. MoCo is a bad business risk and there are many less risky places to invest.
Source 3
You can now be sure of three things happening in fairly short order–1) the on-going pathetic pace of housing development in Montgomery County will become a torridly pathetic pace, especially when it comes to rental housing; 2) new housing will shift even faster to Frederick County, Howard County, Arlington County, Fairfax County, Loudoun County, Prince William County, and DC; and 3) Montgomery County for 15 years has been sliding into a backwater jurisdiction of the DC region, similar to the status long held by Prince George’s County; the slide will now accelerate. Thus, within this decade, business taxes in the County will fall even faster, requiring increases in homeowner taxes and/or slashes in county government services.
Source 4
Rent control covenants on all units adds risk and cost to new development. Both of these will dampen new starts. Who invests $100 million into rent control? Redevelopment of older rental stock will increase if demand is there. Reinvestment in repairs will decline.
Source 5
I am already hearing folks say that they will invest in other jurisdictions. I have transit oriented developer clients that have offices in MoCo and would love to invest here. But with new rent control and the layering of all the other recent increases in taxes and costs and a rogue council, it’s creating uncertainty. There are already thin margins and why invest here when there are many other options in neighboring and other jurisdictions. I’m very concerned about what I’m hearing and I expect housing production to decline.
Source 6
In the short term some projects that are in early stages of planning will be put on the shelf, a few are at such an advanced stage that they will go ahead, and a handful will probably be sold to affordable housing developers who have access to sources of capital that are not available to market rate projects. The net effect over the next 2-3 years is likely to be a reduction in the number of multifamily units built by market-rate developers that will be partly offset by an increase in the number of units developed by quasi-governmental or non-profit entities such as HOC, MHP, etc. Marc Elrich will like this result, because he would prefer less new construction in general and hates the idea that anyone would build housing for profit, but it will mean even less new housing when the county is already way behind.
Many real estate developers and investors are simply looking elsewhere for opportunities. What many progressive activists do not seem to grasp is that while you can’t move the land you own in Montgomery County to Virginia or Florida or Texas you don’t have to redevelop it. And redevelopment is really what we’re talking about in Montgomery County, not the development of vacant land. An aging shopping center in Glenmont, a gas station in the middle of Silver Spring, or a half-vacant office building in Germantown will not get redeveloped into housing and instead the property owner will squeeze as much income as possible out of the existing uses.
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My sources’ comments on new construction will continue in Part Two.