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 a proprietary property-level dataset from loans backed by commercial mortgage backed securities (CMBS) and census tract socioeconomic 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 higher annual NOI and NOI growth and lower delinquency rates. We also show that better tenant protection is associated with lower initial cap rates. The results point to investors perceiving properties in more regulated states as lower risk due to reduced income volatility. 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 housing, rental market, cap rates, volatility, NOI, renter protection.