Rent Control Becoming a Liability in Suburban Maryland

Recently released data shows investment in rental housing has cratered in Montgomery and Prince George’s Counties since both Counties passed rent control laws in the Summer of 2024. Purchases of apartment properties have plunged, indicating owners are shying away from investing further in Suburban Maryland.

• The new laws make acquiring financing for redevelopment and upgrades on existing properties incredibly difficult, increasing the risk of owning and managing them.
• Institutional investors are avoiding the area, deterred by the aggressive regulatory environment and the uncertainties that come with it.

Why this matters: Some Virginia lawmakers want to allow localities in the Commonwealth to implement any type of rent control law, including ones with rolling exemptions where properties of a certain age become rent-controlled after a period of time. Doing so would drive away the institutional investment critical to increasing the supply of badly needed apartments.

By the numbers: Multifamily transaction volume decreased 13% in both counties in the first three quarters of 2024 compared with the same period in 2023, according to data from MSCI Real Assets. Nobody wants to invest money into these properties, meaning the quality of existing housing will suffer over time. 

• At brokerage firm Eastern Union, multifamily transactions in Montgomery County and Prince George’s County declined 80% this year compared with 2023.
• CBRE Group typically facilitates dozens of real estate transactions each year in the two counties. This year it has only completed eight in Montgomery County and six in Prince George’s County.

Meanwhile, multifamily transaction volumes in Northern Virginia over the first nine months of 2024 were 155% higher than in the same period in 2023, demonstrating the Commonwealth's competitive advantage over its DC area neighbors.

What they're saying: Prominent rental housing developers in the region have publicly stated how difficult it is to get institutional financing for large apartment projects in Montgomery County since rent control passed. This applies to both new construction and refinancing of existing apartments. 

• According to Chris Bruch, CEO and President of the Donahoe Companies, a multifamily owner and developer headquartered in Bethesda, MD, institutional investors have "zero interest" in investing in apartment projects in Montgomery County.
• "It's all about underwriting. We need to underwrite with certainty what our returns are going to be. If you are in a regulated market where we don't control that anymore, we're going to go [build] somewhere else."

Bruch made the following comments during a housing panel discussion at the Maryland General Assembly's Senate Judicial Proceedings Committee hearing on January 21.

"A 200-unit project in the county is going to cost about $100 million. We typically put or seek 60% construction financing debt (loan) and then raise 40% equity. A developer typically puts in 5-10% of the total equity in a deal this size, so for us we’d be putting in $4 million cash, leaving $36 million in equity that we need to raise from other sources for the project.

So, what I do is put together a pro forma and pitch the project to investors, pension funds, life insurance companies, sovereign wealth funds, venture capital – whoever will listen and potentially invest. I can say that since the passage of rent control in Montgomery County institutional grade equity, which is what we rely on for projects this size, has zero interest in making investments in these projects.

Just cause (good cause) legislation would be just one more reason not to invest and instead divest holdings in rental properties. Due to the lack of interest from institutional grade equity, we are no longer building in Bethesda where we are based. Effectively, the County is off limits for any pursuit of new development. There is no longer a compelling case to make."