How `Bad' is Renter Protection for Institutional Investment in Multifamily Housing?

Abstract

We assess the role of state-level renter protection regulations on the pricing, performance and risk of multifamily housing. We construct a renter protection score (RPS) to measure the extent of renter protection in each state. Using proprietary property-level dataset from loans backed by commercial mortgage backed securities (CMBS) and census tract socio-economic variables, we study the role of RPS on initial capitalization (cap) rates, annual net operating income (NOI) and annual loan delinquency rates of multifamily housing.
We find that, contrary to conventional wisdom that renter protection is `bad' for investors, multifamily housing in high RPS states is associated with lower initial cap rates. Those properties also perform better in terms of NOI and NOI growth and have significantly lower delinquency. The results point to investors perceiving such properties as lower risk due to reduced income volatility for real estate located in a high RPS state. For institutional investors, higher levels of renter protection are, therefore, not `bad' but are instead associated with lower cash flow volatility and better income growth prospects.

Keywords: Multifamily rental housing, cap rates, volatility risk, NOI, renter protection.