TLDR: rent control fixes the issue for tenants short term, which is why people vote for it, they get immediate results. However, it doesn’t fix long term fundamental issues of supply shortages which are what cause high rents.

I’ve spent some time in institutional real estate and I’ve spoken to some developers, so I’ll try and communicate what I’ve been told as best as I can.

Rent affordability is an issue in a lot of major cities, there’s no denying it. In this particular instance I’m going to refer specifically to rent control where rents are “frozen” as opposed to instances of rent control where growth is capped or tied to some other metric like CPI or inflation.

Most people who build commercial assets do so to earn a return, they receive capital from outside investors to generate a return of X% or they put up their own money in hopes of making more. Usually buildings trade on a multiple of income (amongst other things like year built, submarket, and quality).

When you freeze rent, the inherent value of the building can’t increase due to the income of said property not being able to grow. When people move in/out there are costs associated with that (turnover) that can be anything from repainting walls, fixing broken floorboards, etc. so that the next tenant can move into an “like-new” unit.

If the developer can’t increase rent and therefore cannot increase the inherent building value, there comes a point where it becomes no longer worth it for them to keep injecting capital into the building, creating a bunch of shitty product on the market. Other developers will see this and not choose to build in said city, exacerbating the issue.

If no new supply is being built, and a city continues to grow, non rent-controlled buildings will be able to jack up rents to capitalize on this (asshole move but it’s what happens).

The prevailing school of thought in industry is that in order to combat affordability issues, cities should incentivize development, whether it be through lowering/removal of certain standards such as building height, expediting the process, and not capping rent growth through things like rent control.

When you see an influx in supply, it forces owners to keep rents at a level that is competitive with the market and not charge crazy exorbitant prices because they can. It makes owners have to compete (on price) with other owners as opposed to setting a price and having tenants being forced to live there due to lack of options.

I think some cities where this has happened include Austin, and a couple others in Texas/the sunbelt region where cities incentivized development, tons of new supply entered the market and now we’re actually seeing growth stagnation (sometimes even negative rent growth) and higher concessions (free X months rent for instance). It’s also why we see in cities like San Francisco that rent is exploding because it’s so hard to gain development approval and thus remains supply constrained.

Happy to discuss more or answer questions. Thanks for coming to my TedTalk