Montgomery County developers and realtors are concerned the rent stabilization bill (Bill 15-23) passed by the County Council in July could deter new multifamily development, reduce rental housing stock and have the opposite effect lawmakers sought.
The impact the new legislation – which County Council officials say will start being enforced in late Spring 2024 – will have on development in the county is largely unknown.
One major point of concern for multifamily developers and realtors is if the county will now be able to reach future housing targets. The Metropolitan Washington Council of Governments (MWCOG) estimated that the county needs to add 41,000 housing units from 2020 to 2030 to meet the housing demand, which would be approximately 4,100 new units per year. According to Juliana DeSouza, a data analyst at the county’s Department of Permitting Services, the county added approximately 11,308 new individual 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 going through the pipeline will continue, but you’re going to see projects getting shelved, 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 unit market. It’s just going to be challenging.”
The MBIA is a non-profit trade organization that represents builders, remodelers and developers in Maryland and Washington, D.C.
Alex Vazquez, the Montgomery County lead community organizer at CASA, told MoCo360 he’s skeptical of the development sector’s concerns. “I’m not buying it,” Vazquez said.
CASA is an immigrant organization that worked for two years with more than 40 organizations, faith groups, unions and property owners to bring permanent rent stabilization legislation to the county.
According to Vazquez, concerns about lack of housing stock and a reduction of new housing development have been ongoing before rent stabilization passed and 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 really continue investing in non-profit partners to build affordable housing,” Vazquez said. “… We want housing. We know we need affordable housing, but we also have to ensure that we are protecting the most vulnerable renters and communities.”
Since rent stabilization has passed, Benton said he has spoken with clients that do multifamily development in the county and are looking to pull out of projects and build outside of the county, such as in Northern Virginia. He explained that local and out-of-state developers could be discouraged from bringing new housing projects to the county because of the negative perception that rent stabilization might give to potential investors.
“It’s going to be tough to finance and underwrite some of these projects long term,” he said.
Two discouraged developers are Leigh and Peter Henry of HIP Projects LLC, based in Gaithersburg. In July, they told councilmembers and County Executive Marc Elrich (D) in a letter that in lieu of the looming rent stabilization bill, they decided to halt the next phases of a housing development project with up to 750 new units in Germantown Town Center, the letter stated.
Leigh Henry, the co-managing member at HIP Projects, confirmed in an interview that the company has stopped their project in Germantown Town Center and will not continue to do projects where rent control measures are in place.
“The bill fundamentally changes the relationship between developers and owners and the county and proposes a very elaborate regulatory scheme,” Henry said. She added that the company is now looking at Virginia and other counties in Maryland to start projects.
According to the letter, HIP Projects recently completed the Fairchild Apartments, a 212-unit apartment as part of the Germantown Town Center project. A second 230-unit building was in the preliminary design stage.
“This experience is shared by the approximate 16 apartment developers active in the Montgomery County market,” Henry wrote in the letter to County Council. “Of the six I have thus far spoken to, all have confided that they are finishing out their Montgomery County ‘pipeline’ projects where they have existing financial obligations and are now shifting resources to other areas including Northern Virginia, Texas, the Carolinas and Florida.”
HIP Projects also decided to forgo the redevelopment of three vacant office buildings into apartments, a big 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%, as compared to 2020’s 12.4% first quarter.
Russell Brazil, an associate real estate broker at RLAH @properties and the treasurer of the Greater Capital Area Association of Realtors, told MoCo360 that since the bill passed, he has also seen a number of multifamily projects be put on hold, as well as landlords contacting agents about selling off their rental properties.
Brazil predicts rent stabilization will create an imbalance in the county’s supply and demand for rental units and cause rent in non-rent stabilized or exempt units to “skyrocket.”
Under the new bill, rent increases are set at inflation – the region’s consumer price index (CPI) – plus 3%, with a hard cap at 6% for most apartments in the county. From 2012 to 2022, rent increased an average of 2.1%, according to a Montgomery Planning report.
As rent stabilization plays out, Benton said upcounty communities, such as Germantown, Clarksburg and Damascus could feel the biggest impact, whereas downcounty communities such as Bethesda and Silver Spring are likely to see continued investment due to the proximity to D.C. and transit.
“I do think you’ll see people still try and weather the storm [downcounty],” Benton said. “… You know, the Metro opportunities around there I think will be attractive.”
Not all places in the county will be affected. The cities of Gaithersburg and Rockville are exempt from rent stabilization measures because their city governments operate their own planning and zoning departments, according to Gaithersburg Mayor Jud Ashman.
In July, Ashman and the City Council sent a letter to the County Council opposing rent stabilization and said that the measures could have unintended consequences for renters and taxpayers. “I’m concerned about what happens when you implement rent control,” Ashman said.
“One of the things is that the property values of existing properties go down. And when that happens, property tax–which is the county’s number one source of revenue–goes down too. And so, then the county is faced with the choice to either reduce services or raise taxes,” he said. “Either one of those works to the detriment of all taxpayers, including those in Gaithersburg and Rockville.”
On a similar note, Henry expressed concerns about the impact on county residents, “Nobody should feel sorry for the developers,” she said.
Instead, she is worried about the bigger impact rent stabilization will have on schools as well as the county and state budget should new development dry up and commercial property taxes decline.
According to Ashman, it is hard to know what impacts rent stabilization will have on Gaithersburg and whether developers will turn to the two exempt cities for new development over the rest of the county.
“It’s possible that developers who are looking for prospective properties to develop look at Gaithersburg or Rockville now. Maybe we’ve moved up on the list,” Ashman said. “That’s possible. But I don’t know, honestly.”
Henry says HIP Projects will continue its projects where they own property in Gaithersburg. HIP Projects doesn’t own property in Rockville and said it was possible they may look to develop there. But, Henry said, “There’s a whole big world out there. So, it’s much more likely we would be looking outside [Montgomery County].”
Exemptions under the bill include 23 years for newly built units, 15 years for substantially renovated or rehabilitated buildings, property owners that rent two or fewer units, buildings constructed after Jan. 1, 2000, religious facilities and licensed assisted living and nursing homes, among others.
The lead sponsors of the legislation were councilmembers Natali Fani-Gonzalez (D-Dist. 6) and Sidney Katz (D-Dist.3). County Council voted 7 to 4, with opposition votes from councilmembers Gabe Albornoz (D-At Large), Andrew Friedson (D-Dist. 1), Dawn Luedtke (D-Dist. 7) and Marilyn Balcombe (D-Dist. 2).
Time will tell if rent stabilization has any consequences on development in the county. Councilmember Laurie-Anne Sayles (D-At-large) said in news release after the bill was signed in July, “I will continue to engage with renters and landlords to ensure that the implementation of Bill 15-23 [the county’s rent stabilization bill] goes smoothly and will be ready to adapt, should there be significant changes or unintended consequences of this legislation.”
In an email to MoCo360, a county council public information officer wrote that the new legislation will take effect in 91 days after the bill was signed into law, but will not be enforced until the bill’s regulations are approved by the Council in late Spring 2024.
Currently the county’s Department of Housing and Community Affairs are drafting the regulations. According to the public information officer, the Council will have a final review over the regulations that will occur within the next three months.