Despite ongoing efforts to address the nation’s workforce housing crisis, it remains a critical issue in 2019, leading to a renewed push for rent control. Last month, Oregon enacted our country’s first statewide cap on rental increases. However well-intended, these policies have been proven to fall short of expectations and in most cases do more harm than good.
The specter of rent control is looming large for Chicago. Gov. J.B. Pritzker has been outspoken in his support to repeal Illinois’ 1997 law banning rent regulations. Chicago mayoral candidate Toni Preckwinkle also backs the repeal, while her competitor, Lori Lightfoot, has not taken a formal position despite running ads that mention the challenge of rising rents. At the grassroots level, activists have been calling for rent control in gentrifying neighborhoods where long-term residents are being priced out. In nonbinding referendums in last month’s elections, residents in four wards voted to end the rent control ban.
Yet there are compelling arguments not to allow rent control in Chicago that Chicago’s business community leaders—and all residents—need to hear and understand. As Marcus & Millichap documented in a recent report, more than 30 years of studies in cities such as New York, Los Angeles and San Francisco show that rent control does not solve the workforce housing crisis, and in fact it tends to make it worse. As economist Thomas Sowell has written, “The goals of rent control and its actual consequences are at opposite poles.”
How did we get here? A dozen years ago, the United States was “overhoused.” Following the last recession, years of caution by builders led to limited construction of new single-family homes and only recently an acceleration of multifamily building. This has caused the supply of existing for-sale homes to drop to a record low as household formation has increased. As a result, prices and rents have risen at rates that exceed inflation, increasing the cost of housing for millions of households. In 2016, 48 percent of U.S. renters were cost-burdened—spending 30 percent or more of their income on housing—up from 40 percent in 2001, according to Harvard University’s Joint Center for Housing Studies.
Rent control seems like a simple enough solution, but as research shows, it has a number of unintended consequences, including:
Reduced inventory of rental housing. A Stanford University study of rent control in San Francisco from 1995-2002 found that multifamily inventory dropped by at least 15 percent. This was attributed to landlords converting their buildings to condos or other uses that were not subject to rent-control regulations. In all, the number of people living in buildings under rent control dropped by 25 percent, according to the study. Similar reductions were found in Boston after rent control legislation was implemented.
Higher rents in uncontrolled units. Researchers studying New York City found that rents in non-rent-controlled buildings increased by 22 to 25 percent over what they would have been without rent control. A separate study in Los Angeles found that rents increased three times faster at uncontrolled buildings compared with those at controlled buildings. Moreover, the study concluded it was the policy itself, not other market conditions, that created the disparity.
Impeded development. Without the promise of fair market rates, fewer developers take on new construction. In Ontario, Canada, before rent control was implemented in 1975, the province had an average of 36,800 new-construction starts per year. In the five years after rent control, starts dropped to 14,500 per year, a nearly 50 percent decrease. From 1980 to 1986, they dropped even further, to an average of 13,400 per year. With existing headwinds facing developers in Chicago—rising land and construction costs, higher real estate taxes and more-stringent affordable housing requirements, to name a few—we could see demand outpace supply at a critical time as employers continue to move operations downtown.
Overlooked needs. Landlords with in-demand, rent-controlled apartments can be very selective in tenant selection, with many favoring higher-income households or those without children. Sowell wrote of rent-controlled apartments in San Francisco in 2002, saying, “More than three-quarters of the households in rent-controlled apartments have no children at all.” This means households that stand to benefit most from the legislation in reality fail to realize those benefits.
None of this is what we want for Chicago, nor does it align with the underlying objectives of the legislation.
Don’t misinterpret my position: Chicago (and much of the country) is struggling to provide appropriate rental housing for our workforce, and the issue will only get worse if action is not taken. Ultimately, housing is a supply and demand issue, and Chicago needs to figure out how best to create units that low- and middle-income households can afford. Streamlining the zoning and approval process, allowing for greater density, and easing materials and architectural standards without reducing safety would greatly decrease the costs associated with new construction. Trading a period of tax abatement for a percentage of the new units to be available only to lower household income levels has been well received in other markets. Public-private partnerships that include a housing component have also been used with success.
Modular construction is showing promise for keeping costs low, with companies creating prefabricated multifamily structures that are assembled at the building site or creating large sections in factories to be assembled on the construction site. That approach helps cut costs at all levels of construction, including not only materials but also labor, which has become increasingly costly due to a shortage of skilled workers.
Economists across the political spectrum agree: Rent control does not work. If it did, it would have been the law of the land long ago. Fortunately, those on both sides of this issue are working toward the same goal. Only by working together and exploring new solutions to long-standing problems will we succeed in creating an affordable Chicago for all.
John Sebree is National Director of Multi-Family at Marcus & Millichap, a real estate company headquartered in Calabasas, Calif.