By Adam Pagnucco.
In Parts One and Two, my real estate sources commented on how the new rent control law would affect new construction. In Parts Three and Four, they commented on how the law would affect existing rental properties. Additionally, some could not restrain themselves to answering those narrow questions and insisted on straying farther afield. As one wrote, “More than you requested, but I needed to vent!”
Here are a few more general comments. And let’s remember, these are the people who are directly engaged in the businesses of owning, managing, developing and/or financing real estate. Collectively, they will influence how hundreds of millions of dollars will be spent – or not spent – inside our county.
Source 1
Rent control is simply another data point in the downward trajectory of housing adequacy that policy makers have given to the people of Montgomery County. Consistent property tax increases through rates and assessments, rental properties subsidizing the homestead credit, while important, constant lead and now radon testing, recordation tax increases, time consuming rental surveys threatening $1,000 penalties if not completed, increasing rental license fees, inflating contractor costs, higher utility rates, higher insurance rates, a high interest rate environment, a multi-step background check process for assessing rental applications, an excruciatingly slow legal system to address tenants breaching leases, and 2+ months waiting on the sheriff after the courts have completed their work. Even with all this, homelessness and housing costs continue to rise. With the federal, state, and county governments adding to this list every few months, a responsible decision maker has to look at things in totality and ask themselves: are we making things better or worse?
To be honest, most housing providers will be just fine being able to increase rents 4-5%. Businesses value predictability. That’s the opposite of what they get in Montgomery County. It’s the “what’s next” that will direct construction elsewhere and reduce maintenance and improvements to properties because we don’t know when the next shoe will drop or what it is, but we do know it’s coming.
Source 2
There are so many unintended consequences… this is the most-damaging legislation passed by any Montgomery County Council. By the time they figure it out (declining revenues, even higher taxes on single family residences, and more residents and business leaving due to taxes and housing shortage) it will be too late.
Source 3
MoCo loses real tax base. Death spiral of a New Jersey variety commences. New York consultants will descend on MoCo — they know how to grind it on rent control reductions and passing through whatever it can and as quick as can than otherwise done as you don’t know when the nuts go off again so get it through today. Overhead goes up as someone has to be assigned or hired to deal with a blizzard of new forms and calendars and submissions and compliance — expensive! Engineers will be busy doing studies to max density for new projects on existing facilities. Net loss of old affordable as soon as commercially practical to do so. Increases will always now be pushed to the limit— annually and regularly than otherwise would in the past again to raise the base rents. Conversions will be seriously looked at much more so than in the past as an exit strategy. Non-profits will have to be as competitive as the above if that boat is going to float. They cannot buy out a whole industry.
They have created their own perfect storm.
Source 4
According to a Moody’s Investor Service report cited by Barron’s, overall expenses for commercial real estate properties are up by more than a third between 2017 and 2022. Insurance is up 73% over the last five years, utilities are 40% more expensive, and property taxes and other operating expenses rose 27% and 29% respectively. Not exactly 3%+CPI.
Source 5
One must never forget that since Montgomery’s County executive/council form of government was created in 1970, we have always had liberal county governments. Until now. Thanks to our very first ideological county executive and his council allies, facts and common sense are daily being replaced by “alternative facts” and short-term political expediency. It is the mirror image of Trumpian-style government.
Pagnucco’s Take
First, let’s talk about the recent tax hikes. Yes, they’re a problem. Yes, the increases to recordation and impact taxes are large. But MoCo is not the only jurisdiction that raises taxes. Tax increases were rare across the region this year but they are not rare every year. Some of our competitors have raised taxes over the last couple of years. Others will raise them in the next two or three years. Even the Virginia localities sometimes raise taxes. So over the long term, we are not the only ones.
Also, let’s put taxes into context. Many places in Virginia have higher property taxes than we do. We charge more in income and energy taxes. At the end of the day, the total amount of all taxes may not be wildly different. And to residents of many other parts of the country, all of us – in Maryland, D.C. and Virginia – are high-tax jurisdictions.
But rent control is fundamentally different. It is a long-term, structural change that will damage the industry that delivers more direct revenue to the county budget than any other industry – the real estate industry. We know that it has had enormous negative impacts on housing supply and that it has devastated Takoma Park’s rental market. Unlike periodic tax hikes, the passage of rent control is an epochal event in the history of the county’s economy.
I have been dealing with the county’s business community for more than 15 years. As long as I have known them, they have complained about our politicians and our business climate. But most of them have chosen to muddle through even if they have not aggressively expanded here.
This time is different.
For the first time, I have been hearing this phrase over and over again: WE’RE DONE. I am reminded of this 1985 quote from former county housing director Richard Ferrara that appeared in my article on MoCo’s awful history with rent control in the 1970s.
Every developer that we talked to would say, “As long as we have rent control we don’t know what this crazy local government is going to do to us in two or three years.”
Forty years later, that is EXACTLY how our county’s real estate industry feels about our current local government.
Every industry has risk. The real estate industry is not unique in this regard. Financial markets exist to price risk. Interest rates and lending decisions reflect estimates of risk. Pricing economic risk stemming from macroeconomic factors, local factors and structural characteristics of industries is one thing. But trying to price political risk is almost impossible. What players will want to place bets on the whims of extremist politicians? They won’t. They will simply avoid exposure to them. As long as costs are comparable, returns are higher and risks are lower in other places, that’s where the investment will go. That’s what will happen now.
As the great blues guitarist Robert Johnson sang nearly a century ago:
Standin’ at the crossroad, baby, risin’ sun goin’ down
I believe to my soul, now, poor Bob is sinkin’ down.