Happy Tenants, Happy Landlords: Renter Protection and Institutional Investment in Multifamily Housing

Abstract

Anecdotal evidence suggests that landlords are negatively affected by tenant-friendly regulations, however limited empirical research exists to support this claim. Renter protection is multi-faceted and includes limits on security deposits and longer periods to evict tenants for non-payment. We explore the impact of renter protection, as measured by state landlord and tenant laws, on institutional investment in multifamily housing using granular data on commercial real estate loans. We find that higher levels of renter protection are associated with higher annual net operating income and lower delinquency rate at the property level. This is in line with tighter tenant screening by landlords as a result of more tenant protection. In terms of pricing, investors agree on lower initial cap rates in areas of higher renter regulation at the time of loan origination, viewing such properties as lower risk investments. Overall, we find that higher levels of renter regulation provide benefits to investors and associated screening costs are passed through to renters. To alleviate those effects, we demonstrate that housing supply side policies may moderate the negative effects on renters through reduced tenant screening.

Keywords: Multifamily rental housing, institutional investors, net operating income, housing affordability