Multifamily Rental Housing Performance and Externalities From Local Housing Unaffordability

Abstract

The rental market has become heavily institutionalized leading to changes in the market micro structure. We assess the role of regulations associated with landlord and tenant laws for the pricing and risk of multifamily housing, as measured by the initial capitalization (cap) rate. We use granular data on commercial mortgage backed securities (CMBS) including loan defaults, loan terms, property valuation and annual net operating income (NOI). We find that, contrary to conventional wisdom, investors agree on signifi cantly lower initial cap rates in states with higher renter protection. This is not associated with lower rental income; instead a credit channel can be at play. Multifamily housing buildings in tenant-friendly states are associated with lower credit risk as they are less likely to default leading to signifi cantly lower loan-to-value (LTV) ratios and interest rates. Our fi ndings imply that renter protection is associated with lower credit risk and hence higher prices for multifamily housing in tenant friendly states.