By Adam Pagnucco.
In Part One, my real estate sources began commenting on the impact of the county’s new rent control law on new construction. These are the people who are directly engaged in the businesses of owning, managing, developing and/or financing real estate. Today, the comments continue on this question:
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 7
Short term: It should be expected that there will be little fall off of the development of new for-rent apartment projects in the $50 million and above category, in that the developers are already deeply financially committed to the project.
Mid term: Unless there is a miracle where MoCo can leap beyond the gravity of supply/demand economics, It would be expected that:
- New supply will be shifted away from the County, leading to a decline in new Class A housing, leading to a continued decline in new high-paying employers into the market.
- This will lead to a reduction in impact fees, personal property taxes, permitting fees, and real property taxes.
- This in turn will increase the burden on the existing taxpayer base, making it easier for new employers to shift away from the higher tax jurisdiction.
- Those that can be enticed to build in the reduced pipeline (such as through incentives offered on Metro-land or county owned parcels) will more likely flip institutional holders at a marginal return.
- Conversions of lower-density well located transit-oriented locations such as Germantown Town Center and its transit center will slow or be halted, as developers will simply sit on the existing cash flows from the properties rather than taking those funds and redevelop the area into the high-density – say – 750 residential units and 350,000 new employment.
Source 8
New market-rate multifamily starts will decline dramatically starting in 2024 and new deliveries will begin a dramatic decline starting in 2027. Projects that are under construction or that are entitled and on the verge of starting will finish. Many large equity sources will not invest in markets with rent control of any form. As new market rate unit deliveries decline, so too will moderately priced dwelling units. Housing is undersupplied today, this will make us severely undersupplied. Without ample housing supply, employers will locate in other markets i.e., Virginia.
Source 9
Going back, as somebody who is currently raising capital for projects in the county, the public discussion alone of a rent control bill was more than enough to turn off investors and lenders. They’re gone and the damage is already done. I predict projects will continue to happen in Bethesda where people will be willing to take the risk. The outlook for any new multifamily housing in the rest of the county is going to be catastrophic. The amendments for the bill, which were quite literally written at the dais, reflect a complete lack of engagement with the development and investment communities. Then perhaps even worse than the rent control bill is the recent explosion in the impact, property, and transfer and recordation tax increases. Montgomery County has reached the stage where if they want new projects to happen they will need to provide an aggressive PILOT to overcome these challenges.
Source 10
I am not a developer but I have many developer clients. Even before this bill passed, the political climate alone (discussions of rent control, serious increases in taxes, slow and bureaucratic processes, etc.) had my developer clients talking about focusing on other markets (especially Virginia and the Carolinas). I know one long time developer in the county (who has developed tens of thousands of units) who sold almost all of the older apartment communities they had retained and used the proceeds to purchase newer properties in Virginia. Just look at the situation in Minneapolis and St. Paul to see what happens to future development / housing supply. Pretty much every economic study has shown that rent control depresses the supply of housing.
Pagnucco’s Take
Let’s remember who my sources are. They are not pundits making predictions. They are folks who actually operate in this industry. They are telling us what they, their clients and their colleagues are actually going to do.
And they are unanimous on this point: they, their clients and their colleagues are now much less interested in expanding our housing supply. That’s no surprise given the voluminous economic literature on this subject as well as the post rent-control absence of development and unit losses in Takoma Park. Projects on which shovels are in the ground and developers can’t escape from financing will still proceed as will those that are heavily subsidized by the county. But in several years the slowdown in unit production as well as any condo conversions will start showing up in data sources. By then, the county’s housing shortage will become too entrenched to reverse.
Next: what will happen to existing properties?