Is Rent Control Right For Chicago?

As it is in many areas of the country, rent control is a hot topic in Chicago. Newly sworn-in Illinois governor J.B. Pritzker vowed during his campaign to repeal the statewide ban on rent control. The city’s newly-elected mayor Lori Lightfoot has acknowledged Chicago’s escalating rent rates are placing an increasing burden on residents of rental housing.

Elsewhere, the issue is being as hotly debated as in the Windy City. Earlier this year, Oregon became the nation’s first state to enact statewide rent control. The Beaver State has capped annual rent hikes at seven percent plus inflation for non-exempt units.

Pro-rent control arguments are many and varied. Those in favor of rent control assert it can help preserve stable and income-diverse neighborhoods. Some have argued that New York City’s greatest explosions in new housing construction occurred in the 1920s and two decades after World War II in which tight rent control measures reined. Still other observers call rent control among the most efficient and affordable ways to protect poorer families.

Complex issue

But like some other measures aimed at addressing the nation’s affordable housing crisis, rent control is an issue considerably more nuanced than many might acknowledge. According to Marcus & Millichap, three decades of research on rental prices in New York City, Los Angeles and San Francisco calls into doubt whether rent control is a viable long-term answer.

Researchers have found rent control can engender reduced rental housing availability when buildings are converted to condominiums or other uses not regulated by rent control.

Other effects include substantial rent hikes in uncontrolled housing units, constrained supply resulting from stunted development and increasingly fewer alternatives to those households most requiring rental apartments, such as young families.

Differences exist

“When you say ‘rent control,’ a lot of people assume all municipalities are enacting the same policies,” says John S. Sebree, first vice president, national director for the National Multi-Housing Group at Marcus & Millichap in Chicago. “In actuality, rent control is different in every municipality. At this point in Chicago, there’s no clear or concise detail as to what guidelines the pro-rent control agenda people want to implement. We know overall, rent control has not been proven to provide the answer. It’s not going to solve the issue of basic supply and demand, basic economics.”

Demand for middle-income housing has grown at a faster rate than supply, Sebree said. The majority of units being brought online, including both multifamily and single-family residences, are designed for higher-income levels. Only a segment of the population can afford to rent or buy the new dwellings being delivered. Part of the reason for the mismatch is that in the wake of the Great Recession, lawmakers implemented a number of new regulations that made it very difficult for developers to produce a large volume of starter homes, he said.

“In past cycles, a lot of the people living in B and C quality apartment buildings moved out and became first-time homeowners when the economy trended up,” Sebree noted. “Today, those folks instead are staying in their apartments for a longer period of time, at a time when it’s impossible to build brand new workforce housing without government assistance. As a result, that segment of the population continues to expand. That’s the demand part. Yet the supply of apartments remains constrained.”

Possible solutions

A recent study conducted by the National Multifamily Housing Council determined 30 to 35 percent of new apartment building cost is comprised of soft costs. Those soft costs are made up of zoning fees, application fees, utility hookup fees and the cost of completing reports and studies necessary for the project, Sebree reports.

At the same time, municipalities have instituted guidelines and standards that help ensure high-quality projects.

“They’ve put in restrictions: Building height, building setbacks, density, quality of building materials. And often they require additional green space,” Sebree says. “All those are good for the community, and good for the property. But unfortunately we have such an enormous need there’s an argument it might be time to make adjustments. When you combine these with the soft costs, it becomes almost impossible to build any product without a Class A rent cost attached to it.”

What’s needed, he adds, is a joint effort, a discussion among all sides, leading to adjustments that will allow developers to deliver new product that will be affordable to more of the workforce housing market.

“The most important part of this is we’re talking about our communities,” he concludes. “It’s easy for people to point fingers across the fence. We all agree workforce housing issues exist, but rent control is not the answer.”

This post first appeared on Forbes.com. To see the original, click here.