Capitalization rates, a measure of investment yield that rises as prices fall, climbed in the second quarter in New York, California and Oregon, all states that have enacted rent caps, according to an analysis by Real Capital Analytics Inc.
Rent caps are starting to put pressure on apartment-building prices in the country’s most-expensive real estate markets.
Multifamily properties in states where lawmakers this year have passed tougher restrictions on rent growth are seeing their value erode as investors demand higher returns for the risk of owning the apartments. Capitalization rates — a measure of investment yield that rises as prices fall — climbed in the second quarter in New York, California and Oregon, all states that have enacted rent caps, according to an analysis by Real Capital Analytics Inc.
“I don’t think it’s a coincidence,” said Jim Costello, a senior vice president at the data firm. Investors “are saying that the opportunity for future growth is going to decline, and if I’m paying a price for it today, I need something extra.”
Rising rents have unleashed a pro-tenant fervor among lawmakers in some of the country’s priciest coastal markets as they wrestle with ways to curb unaffordability. In New York, rules were rewritten for about 1 million rent-regulated properties, making it almost impossible for their landlords to raise rates, even after investing in capital improvements. Building sales began declining before the final bill was passed, as investors were uncertain how to price in potential restrictions.
Oregon lawmakers imposed statewide rent regulation on all landlords, limiting increases to 7% annually, in addition to inflation. California had toyed with rent control for more than a year, with the legislature eventually approving a 5% cap, plus inflation, this month.
While the investment-yield increases are small, they might just be the beginning, as buyers establish a new way of valuing apartments in those states, Costello said.
“I do think it can go higher,” he said. “Asset values have changed.”