Should you invest in apartment markets with increasing or already-high tenant protections? The quote above highlights the core questions in today’s issue - the actual impact of so-called “tenant protection” policies as viewed from a dispassionate investment perspective. You are likely to be surprised.

The instinctive response to investing in regulated markets is an emphatic “no,” thinking that with tenant protections comes an erosion of upside including limits on renewal-rent increases, less ability to evict non-paying residents and lots of administrative burden. Maybe true, but let your best investing self hear this: Strong tenant-protection laws drive rents higher and vacancies lower, according to new research.²

The study’s authors constructed a Tenants Rights Index and measured every state’s tenants’ rights laws. The higher the index value, the greater a state’s “friendliness” to tenants. They found a high correlation: The higher the TRI, the less affordable the rental market. Specifically, a one standard deviation TRI increase drove a 10.5 percentage point increase ($107) in median monthly rent, a 2.85 percentage point decrease in the vacancy rate, and even a slight increase in homelessness.

High-TRI states had slightly lower eviction rates, as you would expect, but eviction filing rates were unaffected, suggesting evictions take longer and are less likely to be successful. Earlier studies showed that in high-TRI states landlords increase their spending on stricter tenant screening.

This study covered 2005 to 2016, during which 25 states became more tenant-friendly and only nine less. The study excluded cities with rent control because average and median rents in those markets are highly distorted, although the principles still apply.

New York City is a topical example, with affordable-housing-advocate Zohran Mamdani’s recent upset victory in the mayoral Democratic primary. Per the research, if you expect more tenant friendly regulation in NYC, you can expect rent growth in NYC’s free-market apartments. It already has the highest rents and lowest vacancy of any U.S. city.

To get TRI scores the authors looked at laws in each state regarding rent increase limitations, tenants’ self-help rights, eviction-related statutes and laws governing security deposit caps and return-of-funds timing. Coastal states tended to score highly on the TRI, southern states tended to be landlord-friendly.

The authors gave some helpful context for the work: Evictions are common - more than 2.3 million are filed every year. And they contribute to bad social and economic outcomes for those affected, as Matthew Desmond wrote about in his best-seller Evicted. While that’s behind the political appetite for strong tenant protections, those policies “paradoxically, but unsurprisingly” often backfire.

The ability to evict residents that aren’t paying is just one of several known, core attributes of an efficient rental market in a capitalist economy. Investors know that if new policies complicate a landlord’s ability to act in its economic interests, the landlord will adjust its approach elsewhere to optimize NOI. This is what landlords and their agents get paid to do. So it should not be a surprise that you see higher rents and tighter screening. The policy change helps (temporarily) those few individuals who evade eviction but hurts other stakeholders, especially the many individuals who need but can not find affordable housing.

Why do increased regulations drive rents up and vacancy down? There are a couple solid theories. Landlords in highly regulated markets invest a lot more in tenant screening, and relatedly, these markets have lower tenant default rates, so one theory is the lower vacancy comes from most tenants staying their full term. Another theory: Tenant protections increase landlord costs and they pass those costs back to residents in the form of higher rents.

In all events, as real estate owners we can see that resulting market inefficiency and the natural response pretty clearly. Which brings us to the takeaway: The historical record and the go-forward bet is that tenant-friendly regulations create inefficiencies that are bad for residents and good for landlords. There’s significant precedent for high rent growth and low vacancy in markets with those regulations, and this research should be part of your thinking as you choose target markets.

Who: Parkade

What: They manage all parking operations and payment in multifamily properties, plus give landlords highly informed guidance on rates.

The Sparkle: The most common enterprise property management systems do a surprisingly bad job helping an on-site team manage a parking lot, including who parks where, which parkers have paid and which have not, and especially how to efficiently handle someone parking in someone else’s spot. Parkade solves this, and they not only handle all the parking administration but also tell landlords when they should be charging more on a space-by-space basis.

Check out this Best Illusion of the Year Contest winner… It's a delightful reminder that what our eyes see isn't always the full picture of reality.

Link: https://youtu.be/jrbqIAdDE_w

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