Even in the face of regulatory headwinds, investment analyst Michael Zaransky writes, there are always opportunities in the multifamily investment sector.
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As investors evaluate multifamily opportunities in markets with rent control policies, they often navigate challenges stemming from regulation rather than pure market forces. Political pressure to cap rent growth has risen from economic conditions and tenant advocacy, overshadowing fundamental supply-and-demand dynamics.
Despite the well-documented consequences of restricting rental increases, policymakers continue introducing controls that significantly alter how investors approach acquisitions, underwriting and long-term asset management.
These trends have, in turn, created a mix of opportunities and potential hurdles within many cities’ rent control systems.
Shifting capital allocation and development incentives
Capital naturally flows to markets offering the best risk-adjusted returns, and rent control disrupts that equation. Many cities implementing strict caps on rent growth have witnessed a chilling effect on new multifamily development as investors shy away from projects where predictable cash flow and future appreciation are constrained.
Instead, capital migrates to jurisdictions with more favorable regulatory environments, limiting new supply in rent-controlled areas and exacerbating the very affordability issues these policies seek to address.
Investors recalibrate their financial models for existing assets to account for slower revenue growth. The traditional value-add strategy, where rents rise alongside property improvements, loses viability under strict controls. Without the ability to adjust lease rates in line with rising operational expenses, including property taxes, insurance and maintenance, owners face compressed margins.
In response, some shift toward alternative revenue streams, such as charging for parking, pet fees or amenities, while others explore cost-cutting measures that preserve profitability without violating regulatory constraints.
The market reaction
When rent control discourages new development, the effects ripple through the market in ways that ultimately disadvantage renters. Developers pivot away from projects in regulated jurisdictions, further tightening supply and driving up rents in the surrounding areas where such restrictions do not exist.
This bifurcation leads to unintended consequences; renters seeking affordability find fewer options, while those who remain in rent-controlled units experience reduced mobility as landlords hesitate to turn over units at artificially low rates.
Additionally, investors seeking stable returns divert capital into alternative asset classes, such as industrial or self-storage, or into secondary and tertiary markets where housing policies remain more predictable. Institutional players, in particular, weigh regulatory risk more heavily in their decision-making, and markets with aggressive rent control measures struggle to attract large-scale capital infusions.
Over time, this dynamic reshapes investment activity, concentrating multifamily growth in jurisdictions prioritizing development incentives over restrictive regulations.
Legislative trends and strategic adjustments
While some municipalities continue pursuing rent caps to address housing costs, others recognize the need for policy shifts that encourage new construction. Zoning reforms, density bonuses and reductions in parking requirements represent efforts to counterbalance restrictive policies with measures that facilitate development.
The increasing adoption of accessory dwelling unit (ADU) allowances in high-demand markets exemplifies how cities are attempting to mitigate supply shortages without resorting to rent caps.
For investors, these evolving regulations require assessing risk exposure and operational flexibility. Some adopt hybrid strategies, blending market-rate and rent-controlled units within a portfolio to hedge against regulatory shifts. Others focus on markets where rent control measures come with exemptions for new construction or luxury units, allowing for some degree of rent appreciation despite broader policy constraints.
Understanding the trajectory of these legislative efforts proves critical in maintaining an adaptive and resilient investment approach.
The long-term outlook
The future of multifamily investment remains deeply intertwined with the overarching regulatory environment, but market fundamentals will continue asserting themselves. Where rent control remains in place, supply constraints and capital flight will shape the long-term housing landscape, potentially leading to shifts in political sentiment as affordability challenges persist.
In markets taking a more pro-development stance, increased supply could help stabilize rent growth without resorting to restrictive measures that stifle investment.
Strategic investors recognize that success in this evolving landscape requires more than just adapting to current policies. Engaging in advocacy efforts, participating in local policy discussions and anticipating regulatory shifts allow for proactive decision-making.
Multifamily investment has always been a long-term play, and those who traverse rent control policies with agility and insight will find opportunities even in the face of regulatory headwinds.
Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multifamily properties.
