ESS Essex Property Trust Inc

By Will Parker 

Big apartment owners are forecast to post strong earnings when they start reporting this week, but a number of state-sponsored rent-control measures are starting to raise longer-term concerns.

While most of the dozen or so proposals aimed at curbing rent increases are in their early stages, some states have already taken action.

Oregon passed a law in February that capped rent increases to 7% plus the local inflation rate. Democrats in the Colorado legislature introduced a bill this month to repeal a longstanding ban on rent control, which would allow local governments to set their own rent limits. New York lawmakers are also weighing a cap on rent increases.

Equity Residential, AvalonBay Communities Inc. and Essex Property Trust are among the apartment real-estate investment trusts that could be hit by these measures, which have gained momentum after Democrats took control or increased their numbers in several state legislatures last year.

The prospect of tougher rent control laws hangs over the industry at a time when the apartment business has been strong otherwise, and analysts have a positive near-term outlook.

A recent Barclays PLC report forecast apartment REIT earnings to be strong for the first quarter of 2019, citing high occupancy rates and low apartment turnover. "The tone we're expecting from the multifamily guys should be fairly positive," said Ross Smotrich, a Barclays analyst.

But Mr. Smotrich said speculation over the spread of rent control laws is difficult to account for in longer-term forecasts.

John Pawlowksi, an analyst for the real-estate research firm Green Street Advisors, said the new bills could cause apartment stocks to underperform, despite positive market fundamentals. Green Street downgraded California-focused Essex Property Trust shares to "sell," in part because of political possibilities, he said.

Shares of the six largest apartment REITs are up 9.8% year to date, compared with a 16% gain for the S&P 500 stock index.

SunTrust Robinson Humphrey last summer downgraded Equity Residential from "buy" to "hold." The firm pointed to the landlord's exposure to California, which last year had a ballot measure that would have repealed longstanding limitations on rent control.

The real-estate industry spent millions of dollars to help defeat that measure. But California lawmakers have introduced two new bills that would allow deeper rent control, and some of the other bills have rattled the apartment market.

Equity Residential Chief Executive Officer Mark Parrell said his company plans to expand its political efforts in other states, emphasizing new construction as a way to address affordability issues.

"You should expect us to be active trying to convince both the public and the policy makers of the value of these supply-driven solutions," he said in an interview.

In New York, where a bill to cap rent increases on apartments statewide has the support of the chairman of the State Senate's housing committee, multifamily building sales in the first quarter of 2019 dropped to their lowest point in six years.

While New York State Assembly Speaker Carl Heastie hasn't made that bill part of his housing reform agenda for this year, his spokesman seemed to leave the door open for the statewide rent control measure: "The Assembly Majority has always been a strong supporter of tenants and tenant rights, and this is a new issue that we will be further exploring in our upcoming hearings."

Most New York proposals focus on apartments already covered by existing rent protections. Increased regulation of those units could boost rents on market-rate apartments, if it means less investment and less supply, said Joseph D. Fisher, chief financial officer of Colorado-based landlord UDR Inc. in a February earnings call.

While most of UDR's New York portfolio consists of market-rate apartments, a property it acquired earlier this year in the Williamsburg section of Brooklyn is regulated under current New York laws.

--Inti Pacheco contributed to this article.

(END) Dow Jones Newswires

April 23, 2019 09:56 ET (13:56 GMT)

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