Big landlords, big rent increases and big mistakes

Soaring rents have renewed calls for rent controls.

President Joe Biden, shortly before his re-election, announced a proposal to cap rent increases for corporate landlords.

At a recent campaign rally in Atlanta, Vice President Kamala Harris, who replaced her former boss at the top of the ticket, endorsed Biden’s rent cap plan.

Local rent control advocates like Boston Mayor Michelle Wu have remained silent for now, and a state proposal that would have allowed cities and towns to set maximum rents died well before the legislative session ingloriously ended a little over a week ago.

But it doesn’t take a psychic to predict that it’s only a matter of time before the Boston mayor, as well as her counterparts in other progressive strongholds like Cambridge and Somerville, return to the fight for rent control.

In fact, recent news about the region’s two largest corporate landlords, Equity Residential and AvalonBay Communities, will likely hasten the return of temporarily dormant rent control projects.

Lack of competition leads to price increases

As Banker & Tradesman reported last week, Equity Residential, which owns more than 7,000 mostly luxury apartments in the Boston area, raised rents on those units by 4.3 percent over the past year.

The average rent in the Equity Building is currently over $3,583 per month.

A similar situation is occurring with a similar luxury multifamily building, AvalonBay, which raised rents in 42 different apartment complexes in New England by 4.7 percent, bringing the average rent to a whopping $3,363 per month.

But when calls for rent control — or “rent stabilization,” as it is now euphemistically called — inevitably return, advocates are unlikely to spend much time discussing the factors that allowed the two housing giants to pull off this slow-motion run on the bank.

It’s not that Equity Residential and AvalonBay have covered their tracks and hidden their methods. Quite the opposite, they’ve been brazen in explaining how they’ve raked in all those extra millions in profits from an already stressed and maxed out rental market.

No, the real reason is that even a cursory analysis would reveal some basic facts that undermine the wisdom of trying to lower rents through government fiat rather than using market forces.

The lack of competition from new developments is a major factor in the rent increases, AvalonBay Chief Operating Officer Sean Breslin recently told analysts during the company’s second-quarter earnings conference call.

As the number of new apartment building starts continues to decline, rents may increase even further.

A building in Boston collapsed

While there was no mention of the rental market situation in the greater Boston area, following this fairly rational logic, we can expect potentially even larger rent increases in the city.

Sure, the number of new rental apartments and homes being built has declined statewide.

But in Boston itself, historically one of the region’s biggest real estate producers, that number has fallen even more.

Developers withdrew building permits for just 78 new homes in July, the lowest number since July 2018.

And according to city data, through the end of July 2024, the pace of new housing construction in Boston was even lower than the pathetic pace in 2023.

The Hub saw just 2,083 building permits issued last year, many of them for public housing or non-market-rate projects. That’s down from more than 3,800 units, many of them market-rate, in 2022 and more than 3,000 in 2021.

So we can pretty much guess where rents are headed in Boston. Equity and AvalonBay executives opened up their playbooks and told us how their game plans are working at the high end of the area’s rental market, and it doesn’t take a genius to realize that the same dynamics are at work at lower price points, too.

Build, build – don’t limit, limit

Moreover, it doesn’t take any complicated reverse engineering to figure out that if scarcity is the primary factor enabling corporate landlords to raise rents, then a large number – a surplus – of new rental units coming onto the market will help to lower them.

So will we soon hear leaders in Boston, Cambridge, and Somerville adopt the mantra of build, build, build rather than cut, cut, cut?

Almost certainly not. It would require a much more substantial embrace of the idea that market forces, not government intervention, are the key to solving the housing crisis than they have shown so far.

While staunch progressives may feel compelled to declare that building more housing is the key to lowering prices and rents, they clearly remain skeptical.

Sure, the Federal Reserve’s decision to raise interest rates from mid-2022 into 2023, coupled with the skyrocketing costs of construction in the Boston metropolitan area, were certainly major factors forcing developers to shelve plans to build new apartment buildings and condos across the city.

But the Wu administration’s insistence on introducing new, more expensive, affordable housing and mandating the use of renewable energy sources has also contributed to the decline in construction activity, according to real estate and business leaders.

When interest rates fall in the next 12 months, as they most likely will, these costly solutions will become an even more important factor in preventing projects that might otherwise be feasible.

Adopting a “build, build, build” approach would also require some of our more progressive local leaders to take a hard look at the role their own policies are playing in limiting housing supply.

Given the nature of politics and politicians, this is unlikely to happen.

Scott Van Voorhis is a columnist and publisher of Banker & Tradesman. Contrarian Boston Newsletter; the opinions expressed are his own. He can be contacted atE-mail address: [email protected].