What does rent stability mean for development in MoCo?
Developers and Realtors in Montgomery County are concerned that the rent stabilization bill (Bill 15-23) passed by the County Council in July could hinder new multifamily development, reduce the rental housing stock and have the opposite effect that lawmakers seek.
The impact of the new legislation — which City Council officials say will go into effect in late spring 2024 — will have an impact on development in the county that is largely unknown.
One major point of concern for developers and multifamily property owners is whether the county will now be able to reach future housing goals. The Metropolitan Washington Council of Governments (MWCOG) estimates that the District needs to add 41,000 housing units from 2020 to 2030 to meet housing demand, which will be about 4,100 new units per year. According to Juliana DeSouza, a data analyst with the county’s Department of Permitting Services, the county added approximately 11,308 new single-family housing units from Jan. 1, 2020, to July 31, 2023 — 3,686 units and 3,868 units in 2021 and 2022, respectively.
“By 2024, projects that are currently underway will continue, but you will see projects postponed, and companies pulling out entirely,” said Griffin Benton, vice president of government affairs at the Maryland Building Industry Association (MBIA). . “You know, by 2025 to 2027, you’re going to see a real crunch in the rental market. It’s just going to be a challenge.”
MBIA is a nonprofit trade organization representing builders, remodelers, and developers in Maryland and Washington, D.C
Alex Vasquez, CASA’s lead community organizer in Montgomery County, told MoCo360 that he is skeptical of the development sector’s concerns. “I’m not buying it,” Vazquez said.
CASA is an immigrant organization that has worked for two years with more than 40 organizations, faith groups, unions and landlords to bring permanent rent stabilization legislation to the province.
According to Vasquez, concerns about housing shortages and decreased new housing development were ongoing before rent stabilization was passed, and he added that there are protections in the bill for landlords to get a fair return on investment.
“I think it’s a beautiful opportunity to continue investing in nonprofit partners to build affordable housing,” Vasquez said. “…We want housing. We know we need affordable housing, but we also have to make sure we protect our most vulnerable renters and communities.
Since rent stabilization, Benton said he has spoken with clients who are doing multifamily development in the county and are looking to pull out of projects and build outside the county, such as in Northern Virginia. He explained that local and outside developers could be discouraged from bringing new housing projects to the county because of the negative perception that rent stability may give to potential investors.
“It will be difficult to finance and guarantee some of these projects in the long term,” he said.
Two frustrated developers are Lee and Peter Henry of HIP Projects LLC, based in Gaithersburg. In July, they told council members and County Executive Mark Elrich (D) in a letter that instead of a looming rent stabilization bill, they had decided to halt the next phases of a housing development project with up to 750 new units at the Germantown Town Center. The message stated.
Lee Henry, co-managing member of HIP Projects, confirmed in an interview that the company has halted its Germantown Town Center project and will not continue with projects where rent control measures are in place.
“The bill fundamentally changes the relationship between developers, owners and the county and proposes a very detailed regulatory scheme,” Henry said. She added that the company is now looking to Virginia and other counties in Maryland to start projects.
According to the letter, HIP Projects recently completed Fairchild Apartments, a 212-unit apartment as part of the Germantown Town Center project. A second 230-unit building was in the preliminary design phase.
“This experience is shared by approximately 16 active apartment developers in the Montgomery County market,” Henry wrote in the letter to the County Council. “Of the six people I have spoken to so far, all have confided that they are close to completing their ‘pipeline’ projects in Montgomery County where they have existing financial commitments and are now shifting resources to other areas including Northern Virginia, Texas, the Carolinas and Florida.” .
HIP Projects also decided to forego the redevelopment of three vacant office buildings into apartments, a major opportunity for new housing projects, they wrote in the letter. According to a Montgomery planning report, the county’s office vacancy rate in the first quarter of 2023 was 16.3%, compared to the first quarter of 2020 of 12.4%.
Russell Brazile, an associate real estate broker with RLAHproperties and treasurer of the Greater Capital Area Association of Realtors, told MoCo360 that since the bill was passed, he has also seen a number of multifamily projects put on hold, as well as landlords contacting agents about selling their rental properties.
Brazil expects that rent stabilization will create an imbalance in the province’s supply and demand for rental units, and lead to higher rents in unstable or rent-exempt units.
Under the new bill, rent increases are based on inflation — the area’s consumer price index (CPI) — plus 3%, with a cap of 6% for most apartments in the county. From 2012 to 2022, rent rose an average of 2.1%, according to a Montgomery planning report.
As rents continue to stabilize, Benton said upstate communities like Germantown, Clarksburg and Damascus could feel the biggest impact, while midcounty communities like Bethesda and Silver Spring are likely to see continued investment due to their proximity to D.C. and transportation.
“I think you’ll see people still trying to weather the (downtown) storm,” Benton said. “…You know, I think the metro opportunities there are going to be attractive.”
Not all locations in the province will be affected. The cities of Gaithersburg and Rockville are exempt from rent stabilization measures because their city governments run their own planning and zoning departments, according to Gaithersburg Mayor Judd Ashman.
In July, Ashman and the City Council sent a letter to the County Council opposing rent stabilization, saying such measures could have unintended consequences for tenants and taxpayers. “I’m concerned about what happens when rent control is implemented,” Ashman said.
“One thing is that the property values on existing properties go down. When that happens, the property tax — which is the county’s No. 1 source of revenue — goes down as well. “And so, the county faces a choice of either cutting services or increasing taxes,” he added. “Either one works.” Accounting for all taxpayers, including those who live in Gaithersburg and Rockville.”
On a similar note, Henry expressed concerns about the impact on county residents: “No one should feel sorry for developers,” she said.
Instead, she’s concerned about the greater impact rent stabilization will have on schools as well as on the county and state budgets if new development dries up and commercial property taxes decline.
According to Ashman, it’s difficult to know what effects rent stabilization will have on Gaithersburg and whether developers will turn to the two exempt cities for new development in the rest of the county.
“It’s possible that developers looking for potential properties to develop might be looking at Gaithersburg or Rockville now. Maybe we’re ahead of the list,” Ashman said. “It’s possible.” But I honestly don’t know.”
Henry says HIP Projects will continue its projects where it owns properties in Gaithersburg. HIP Projects does not own property in Rockville, and said it could look to develop there. But Henry said, “There’s a whole big world out there. So, we’re more likely to look outside (Montgomery County).”
Exemptions under the bill include 23 years for newly built units, 15 years for buildings that have been substantially renovated or rehabilitated, property owners who rent two or fewer units, buildings constructed after January 1, 2000, religious facilities and licensed assisted living and nursing homes, among others. .
The legislation’s primary sponsors were Assemblymembers Natalie Fanny Gonzalez (D-District 6) and Sydney Katz (D-District 3). The County Council voted 7-4, with dissenting votes from Council Members Gabe Albornoz (D-District 1), Andrew Friedson (D-District 1), Don Luedtke (D-District 7), and Marilyn Balcomb (D-District 2) . .
Time will tell if rent stabilization has any consequences for development in the county. “I will continue to work with tenants and landlords to ensure the implementation of Bill 15-23 (the county’s rent stabilization bill) runs smoothly and will be ready to adapt,” Councilwoman Lori Ann Sayles (D-At large) said in a press release after signing the bill in July. In the event that significant changes or unintended consequences occur to this legislation.
In an email to MoCo360, the County Council public information officer wrote that the new legislation would go into effect within 91 days after the bill is signed into law, but will not be implemented until the bill’s regulations are approved by the council in late spring 2024.
The provincial Department of Housing and Community Affairs is currently drafting regulations. According to the media official, the council will conduct a final review of the regulations that will take place during the next three months.