In 2019 the state of Oregon passed a statewide rent control law that is now impacting tenants and landlords in Eugene, Lane County, and beyond. Learn about the various ways that this law is disrupting the multifamily market in Oregon and how multifamily property investors might respond.
After working as a commercial real estate broker for sixteen years and previously working as a mortgage lender for twenty-three, I am passionate about helping people understand the value of their portfolio, whether they can improve it, and the strategies and options to do so.
What You Will Learn in Episode 1:
Rent Control in Oregon and Its Impact on Multifamily Properties
- How rent control has altered the relationship between tenants and landlords in Lane County
- No cause notices, and the new laws for apartment owners
- How the rent control issue took hold in Portland, paving the way for statewide rent control
- How to track violations of rental contracts and apply the three-strike rule
- Rent control, vacancies, and oversupply in Portland and the UO area
Oregon’s 2019 statewide rent control law is disrupting the multifamily market in Lane County and throughout the state. The law is affecting tenant-landlord relationships, rent hikes, and the actions landlords can take against rental contract violations. As an apartment investor, it’s wise to learn about the various effects and how you might take advantage of the disruption.Read the Full Transcript
Rent Control in Oregon and Its Impact on Multifamily Properties
Barry MacGuire: Welcome to the Disruptions in Oregon Real Estate podcast with your host, René Nelson, helping you stay in the driver’s seat of your investment portfolio. As a commercial real estate broker and investor herself, author René Nelson’s passion is to keep your hard-earned real estate investments working for you.
Her goal is to help Oregon real estate investors analyze and measure the value of their current real estate portfolio while exploring available opportunities. And now your host, René Nelson.
René Nelson: Hi, this is Rene, and I’m here on my weekly podcast about disruptions in Oregon real estate and what you need to know in order to stay on top of your game as a multifamily owner. Today in this episode we’re going to talk about rent control in Oregon and how Senate bill 608 is impacting multifamily properties in Oregon. I’ve asked my producer, Barry MacGuire, to join me and we’ll have a round of series of questions and talk about rent control.
Barry MacGuire: Thank you so much for having me, Rene. So big things happened in 2019 as far as rent control came down. This is back in February, right?
René Nelson: Yeah. Rent control was passed in February. It was passed the year before in Portland in Multnomah County primarily, so we had a little bit of a preview of what to expect. But then rent control statewide for the whole state of Oregon was passed in February of 2019, and we’ve seen some pretty big sweeping changes this year.
Barry MacGuire: So the question is, how has rent control impacted landlords here in the state of Oregon?
René Nelson: Well, in my opinion, it’s substantially altered the relationship between landlords and tenants. And for a lot of landlords, they’re confused about what the rules are, how it applies to them. Some of the landlords are also operating from a state of fear because they’re concerned that they’ve got a target painted on their back.
A lot of tenants are concerned that they’re going to get the boot, that they’re going to get kicked out of their units. So I think what we should do is just break it down and talk about some of the nuts and bolts of the rent control and how it impacts both the tenants, as well as the landlord.
Barry MacGuire: Well, that’s surprising. So rent control actually impacts tenants as well?
René Nelson: It does, but it ironically, it gives them a little bit of a benefit because there’s rent control now where their rent cannot go above 10.3%, and when the rent control was passed statewide, one of the things that they kind of took away from landlords was the ability to give a no cause notice.
So in the past, as a property owner, as an apartment complex owner, if I had a tenant that was creating a problem, I would just give a no cause notice to that tenant and say, “Hey, I’m sorry but you have to move.”
That made it livable for the other tenants in the complex. So if you had somebody that had late night parties, loud music, and you just didn’t want to really deal with that, you’d just give them a no cause notice and say, “Hey, you got to move.” Now they’ve changed that. You no longer can give a no cause notice. Now you have to give them-
Barry MacGuire: At all?
René Nelson: At all.
Barry MacGuire: Really?
René Nelson: Yes.
Barry MacGuire: Well, what do you do now?
René Nelson: So now you have to give them a reason. You have to give them a cause and say “You’re violating your rental contract. Here’s the reason that I’m giving you this notice for cause.”
Barry MacGuire: Do you know the reasoning for this?
René Nelson: Well, basically what happened in 2016 and ’17 when the real estate boom hit, primarily in Portland, there were some out of town investors that went into the Portland market and would give whole apartment complexes a 30 to 60 day, no cause notice and just say, “Everybody move out. We’re going to rehab this whole complex.” And they doubled rents.
So in one particular situation that was really the tipping point, they kicked out, or gave notice to, quite a few tenants and instead of really going in and rehabbing the whole complex, they basically did paint and carpet, and then they doubled the rents.
Barry MacGuire: That’s it. Okay.
René Nelson: That’s it. And so that was brought to the attention of some legislators. And of course those tenants were irate because they had to move. It was tough. There was not a lot of available options for rent in Portland and their rent was substantially higher.
So not everybody could qualify to move. Not everybody could find a place to live. And so a lot of those people created a grassroots movement in Portland to start the rent control situation. And from that grassroots then it went to the legislators and it was brought to their attention.
The legislators were already aware of the housing crisis and the fact that, you know, we need more housing with density and some different things. Developers in the past have been not super excited to build brand new apartment complexes because it’s really expensive.
By the time you pay all the development fees to the city, it’s really expensive. So kind of the inventory that we have is what is there and what’s available. So as these out-of-state developers came into Portland and kicked out all these tenants, did paint and carpet and then doubled rents, the legislators started to see a pattern there and they realized, “Hey, we have to make some rules in order to protect the tenants.”
So they created rent control and basically what they said statewide for this year when they pass rent control is they said rents cannot go higher than 7% plus CPI, which stands for consumer price index. And the CPI right now is 3.3, so rent cannot be increased more than 10.3% annually every 12 months.
Next year in 2020 it’ll be 9.9 because CPI has dropped a little bit. So that’s a protectant for the tenants. And frankly, Barry, you know, most landlords, they have not raised their rents 10% every year like clockwork.
Barry MacGuire: I was just about to say does that seem like a pretty fair window, though? You know, up to 10% above that would seem kind of extreme, wouldn’t it?
René Nelson: It is. It’s actually gracious because, you know, most landlords have raised their rents, maybe like 25-50 bucks. You know, I’ve got one tenant that’s lived with me in one of my properties for 15 years, and I probably have only raised her rent twice, maybe three times in total in that 12 to 15 year time period.
She’s a great tenant, pays on time. I just love her and her family being in my property. They take really good care of it, and I have not wanted to rock the boat, so I have not raised her rent. And there’ve been lots of landlords that have been in that situation where we just haven’t wanted to raise rent.
Now if somebody moves out, then of course you look at market rent and you raise the rent then. So when we heard that the legislators were going to say, “Okay, rent control is 10.3%,” we didn’t feel like that that was going to be a detriment.
We felt like it was fair to both sides, both the tenants, because now they know what they can expect for rent increases, and it was fair to the landlords because now they had a benchmark and they knew what their limits were going to be. But where it really became detrimental for apartment owners, when they took away the no cause notice because now it makes it extremely difficult to deal with trouble tenants.
Barry MacGuire: Well, that’s a lose-lose situation there. It’s not only bad for you as the landlord, but it’s bad for the rest of the tenants that are doing the right thing.
René Nelson: It is. So in the past we would have good tenants that would go to the property manager or the owner and say, “Hey, I hate to complain, but this guy is playing loud music, and I have to get up in the morning and get my kids to school and then go to work. And he’s playing music till three or four in the morning and this has been going on.”
So you give that tenant a notice or a warning, and normally they’ll correct their behavior. But let’s say they don’t and you just say, “Okay, enough,” in the past you’d give them a no cause notice and just say, “I’m not really going to get into details. You just have to move. Here’s your notice.” And it was typically a 30-day no cause notice that you would give them.
So the situation would go away pretty quick, and you would keep your good tenants. Now that no cause notices have been banished, now you’ve got problems where if you tell somebody, “Hey, you’re violating your rental contract for a noise complaint,” all they have to do is correct that for that time period, and then maybe they do it again in a week, and you’re back to having to re-notice them.
Barry MacGuire: There’s got to be some line in the sand where okay, at some point there’s got to be some way you can get rid of this tenant.
René Nelson: There are, if they violate their rental contract, then yes. So as an example, if they don’t pay their rent on time, then they’re violating their contract and you have cause and you can notify them. If they leave junk out on their balcony, then you can give them a cause notice and say you have to clean up your unit. But overall if it’s like a noise complaint, those are going to take a process.
So now what happens is you have to keep track of those and the three strikes and you’re out rule applies. So if they violate their contract three times in 12 months, then you can notify them, “Hey, you violated. Your tendency is being terminated.”
But let’s say you show up because they’re having a loud party, and so there’s underage drinking, there’s 40 people in the unit, and there’s no smoke detector batteries in the smoke detector. You can’t give them three notices on that one violation. You can only notify them for one thing.
So in that situation it would be too many people in the unit or a noise complaint. You’d have to go back several days later and check the smoke detector batteries and let that be a second violation. But you can’t pile them all up for one situation and give them a three strike, you’re out.
Barry MacGuire: Three strikes, you’re out. In the meantime you’ve got the good tenants leaving.
René Nelson: Yes, we are starting to see that.
Barry MacGuire: That’s just a messed up situation. Sorry, can’t think of other ways to put it. But this whole idea of rent control here in Oregon, it just seems like one or two bad apples, some out-of-state investors that, like you said, just threw on some paint and did the carpets and unfairly raised the rents. Well, it just ruined it for everybody else, didn’t it?
René Nelson: It really did. And what happened when they created these laws is the legislators got together, and they really didn’t take the input from the landlords. The landlords tried to give the input and say, you know, “Please don’t take the no cause notice because here’s what it does from our situation.” And frankly I don’t think the legislators really listened. They kind of had the bit in their teeth and said, “Nope, this is what we think the law needs to be.”
But what I’ve seen for a lot of apartment owners is it’s backfired because for the tenant situation, a lot of landlords are deciding to sell because they don’t want the legislators to be in their business. They don’t want the government control. And so they’re deciding to sell and get out of the market.
So as property owners put their property up for sale, what I’m starting to see is more of those two to four units, in particular, those are being sold to owner occupants, and it’s diminishing the available units that are out there for rent. So if a tenant is told by their landlord, “Hey, I’m going to sell this property, and you need to move,” and the tenant now tries to go find a new place to live, there’s not a lot of inventory out there for rent. There is for sale.
24 months ago there were probably, you know, one or two duplexes at any given time listed for sale. Now you look in the multiple listing system, and there’s probably six to 14 that are listed at any point in time right now because there’s that many owners that are saying, “I’m getting out of the market.”
Barry MacGuire: It sounds like everything is reverberating real quickly.
René Nelson: It is. It was really a knee jerk reaction. When the legislators passed these laws a lot of the landlords just decided quickly, “Okay, I’m getting out of this market.” Because for a lot of the small mom and pop operators, they’re in a situation where they either have to become super knowledgeable on what the tenant landlord laws are because the penalties are stiff.
If you make a mistake and you give a tenant a no cause notice, then the tenant can actually sue you for damages, and it’s really expensive if you make a mistake.
And so for a lot of mom and pop operators that have rolled up their sleeves, shirt sleeves, and they’ve self-managed, and they’ve not had a property manager, and they’ve basically taken that money that they would’ve paid to a property manager and they’ve received it as profit, now they have to weigh it out, “Okay, is it still profitable to own this property and now run the risk of either getting sued if I make a mistake, or do I need to hire professional management and let a professional manager take care of noticing, dealing with tenants, screening tenants, and trying to fill my units?” And for a lot of people they don’t want to deal with a property manager, and so it’s just easier for them to sell the property and get out.
Barry MacGuire: With rent control have you seen a correlation between the rent control and vacancy rates here in the state of Oregon?
René Nelson: We’re starting to see higher vacancy rates occur in Portland, and in the past vacancy was pretty slim in the Portland market, and we’re starting to see that there are some vacancy occurring in Portland. And Eugene is still kind of on the bubble. Right now what we’re seeing is there are people that are trying to move, and they’re waiting for units to become available.
We’re starting to see some new inventory come on the market, but you know, those are in the $1400-1600 range and not everybody in Eugene-Springfield can afford that higher rent.
Barry MacGuire: Just curious, how about around the University of Oregon campus?
René Nelson: We’re definitely seeing some vacancy in that area right now. Primarily because of the overbuilding that’s happening. There’s a lot of national student housing developers that are still coming to the market that want to build those big institutional style properties where, you know, it’s 500 beds to 1,000 beds in those units.
And ironically the enrollment at the U of O level seems to be pretty consistent, almost stagnant. I mean, you know, we haven’t built a ton of classrooms, so it’s not like we’ve had a big explosion of students coming to the market. It seems pretty consistent. And so to know that we’ve got probably 1500 to 3000 beds that will be built in the next 24 months in the U of O area-
Barry MacGuire: Over-supply.
René Nelson: We’re going to have an over-supply.
Barry MacGuire: Okay. What’s the next step? Incentives?
René Nelson: I think we’ll see incentives in the campus area. I don’t think we’ll see incentives for market rate. And when I say market rate, that’s away from campus and that’s where just the average person would live that’s not a student. I don’t think we’ll see incentives in the near future because I still think there’s a healthy supply and demand in the market. For a lot of owners, though, that are just trying to figure out, “Okay, what do I do next?” For them, what they need is to know kind of some strategies.
So one thing that I do for a lot of my clients is help them figure out the value of their property so they can really look at their asset and look at their apartment complex and say, “What’s it worth in today’s market?” And then “What could I earn if I increase my rents by 9.9% next year, and what could I go into if I decided to sell this property? Where could I go? What product type could I go into? How much income could I generate? Could I get out of multifamily and go into a different product type?”
So when I talk about product type, what that looks like is somebody that would come out of multifamily and may go into least commercial. So they may consider office or a retail type of property.
Barry MacGuire: Storage?
René Nelson: Yeah. Oh, many storages in high demand right now. That’s really a great industry that a lot of people are trying to buy that type of product.
Barry MacGuire: So there is hope for real estate investors, though, isn’t there?
René Nelson: There is. You know, I don’t want this to sound all gloom and doom today because it’s really not. I have a lot of investors that I work with that are Oregon investors.
We’ve started to see out-of-state investors primarily out of the California market that have slowed down, so when rent control was passed, we saw about a 38% decrease of investors coming into the Oregon market. That was by the CoStar group that provided that information and those statistics, but they did say that out-of-state investors dropped by about 38% coming into Oregon.
Barry MacGuire: That’s pretty significant.
René Nelson: It is, but that’s also good news because that means Oregon investors that own apartments right now, they’re not going to have as much competition. In the last two years, what we watched was there was very little inventory on the market, and California investors that were coming into the market, especially 1031 buyers, they were driving the sales prices up because of demand, so not much inventory on the market.
When you’re in a 1031 exchange, you have a very short window to find a property and identify what you’re going to buy, so they would really drive prices up. And a lot of apartment investors and owners in the Oregon market said, “I can’t compete with these guys coming out of California that have been receiving a three and a half percent cap rate, and they think that’s a great return,” where in our market we see cap rates more in the five and a half to 6% range.
So as the California investors started to slow down and their appetite changed with rent control, we started to see them gravitate to markets like Phoenix. A lot of them went to Seattle, Tampa, I mean just out of Oregon.
And so the benefit for Oregon apartment owners is we’re starting to see inventory and available product, especially apartment complexes for sale in the area and in the state of Oregon that have not been available in the past, and there’s not that pent up demand like it has been in the past.
So prices are more reasonable, sellers are more willing to negotiate on price. Where in the past it was, “Hey, take it or leave it. I’ve got the one and only 40 unit apartment complex for sale on the market. Take it or leave it. Here’s my price.” And now because there’s competition and there’s apartments for sale, sellers are more reasonable, and I feel like buyers can find a better value right now.
Barry MacGuire: You are just a wealth of knowledge. You could tell. This is not her first day doing this kind of thing. How long have you been doing this?
René Nelson: I’ve been doing this 16 years, and prior to that I was a mortgage lender for 23 years. So I’m pretty passionate about what I do because I really want to help people understand their value of their portfolio and what they own, and if they could improve it, look at different strategies and options on how to do that.
Barry MacGuire: I can tell you the passion definitely comes through. The book is called Disruptions in Oregon Real Estate, and if people want a copy of this, how can they do so?
René Nelson: You can go to my website, which is eugene-commercial.com. Again, that’s eugene-commercial.com, or go to my website, disruptionsinoregonrealestate.com.
You can put your name and your email address in there and download a copy of the book, and I will also mail you a paper copy if you’re one of those that likes to read at night and you want an actual paper copy. So you can download it online and get a free ebook, or I’ll mail you a copy.
Barry MacGuire: All right. This has been the first… How did it feel? Our first podcast together. Felt pretty good to me.
René Nelson: It did, Barry. Yeah, feels great.
Barry MacGuire: This has been the Disruptions in Oregon Real Estate podcast. We’ll talk to you soon.
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