Absent a union contract, musicians usually can charge whatever they want for their services. Although there are guidelines that can help musicians and employers, such as studios, set market fees, the only real constraint on musicians is what consumers will pay.
If a musician is a highly desired performer or teacher, people will pay a high fee for their services. If a musician charges more than consumers will pay given their expertise and reputation, the musician won’t get many gigs or students. The musician may reduce their fee to attract more business, but they aren't mandated to do so.
But if a music student isn’t willing to pay a reasonable rate for lessons, they may not find a teacher willing to accept them. If an orchestra isn’t willing to pay a fair price for its soloist, soloists may refuse the gig. Only when the musician agrees to a contract are they bound to charge a particular amount.
Except in a handful of markets, multifamily rents likewise have been controlled by market conditions. Except where landlords agreed to accept government tax abatements, subsidies, or other benefits, landlords were mostly free to set rents as they saw fit.
If a landlord charged too much rent, tenants would move out, and new ones wouldn't move in. If all rents went up due to limited supply, developers would seize the opportunity to build new apartment buildings. As the supply of apartments increased, rents would stabilize or decrease, and development would stop.
This pattern led to an 18-year real estate cycle, which, absent extraordinary events, such as the COVID-19 pandemic or government action (such as the 1970s interest rate changes), has been predictable since the late 19th century. Recent Federal Reserve interest rate increases designed to control growth and ultimately stabilize the economy have impacted the cycle on a national level. However, recent local government rent control laws could impact the real estate cycle on a local level.
On February 21, 2023, Mount Rainier, a small city in Prince Georges County, Maryland (PG County), adopted a rent control law. In response, on March 2, 2023, PG County followed Mount Rainier by adopting its Rent Stabilization Act of 2023 (PG County Law). The PG County law will apply in unincorporated areas of PG County, so it won’t affect Mount Rainier’s law. This article discusses the PG County Law and the pros and cons of the new law and rent control generally.
Prince George’s County
Rent control should be evaluated in the context of the local population living in rental housing. Proponents of rent control often focus on the impact of significant rent increases on lower-income households. If the household has no cash reserves and struggles to meet expenses, it likely cannot support a significant rent increase.
PG County covers 499 square miles. With a population of 955,306 according to 2022 Census Bureau estimates, the county is the second largest in Maryland. PG County’s population is diverse, with 64.1% of residents identifying as Black, 20.4% identifying as Hispanic or Latino, 11.9% identifying as White and not Hispanic or Latino, 4.4% identifying as Asian alone, and $2.8% identifying as two or more races.
The Census Bureau reports a 62.2% owner-occupied housing rate in PG County from 2017-2021, while 37.8% of residents lived in rental housing with a median gross rent of $1,593. The median household income from 2017-21 in 2021 was $91,124 in 2021 dollars, and 11.5% of the population was in poverty.
The City of Mount Rainier occupies only 0.65 square miles of land. Its population of 8,333 in 2020 was less than one percent of PG County’s total population. Contrasting with PG County, the Census Bureau reported a 25.2% owner-occupied housing rate from 2017-2021, while 74.8% of residents lived in rental housing with a median gross rent of $1,342. Although Mount Rainier’s median household income of $59,268 was significantly lower than PG County’s, a smaller percentage (7.9%) of Mount Rainier’s residents live in poverty.
PG County’s Rent Control Law
The PG County law is temporary. It automatically expires one year after its effective date (45 days after it was passed).
Unlike the Mount Rainier law, which tied rent increases to the Consumer Price Index (CPI), the PG County law limits rent increases to three percent 3.0%). That amount is just under half of the 6.2% year-over-year increase in rents of primary residences from January 2022 to January 2023 reported by the Bureau of Labor Statistics for the DC-VA-MD-WV area.
The PG County doesn't apply to properties that received their initial use and occupancy permit within five years prior to the effective date. The PG County law also doesn't apply to affordable housing with government subsidies or affordable housing covenants, units where the tenant is receiving rent assistance, and landlords who have contracts with a government agency to provide low- to moderate-income level households.
Unlike Mount Rainier’s law, under the PG County Law, landlords cannot apply for exceptions if necessary to provide a fair return on their investment. So, for one year, landlords must absorb uncontrollable costs like real estate tax increases.
Pros and Cons of the PG County Law
A major pro of the PG County Law is that it is temporary. Because the law expires after one year, the County Council may reevaluate rent control in 2024 and evaluate whether rent increase limitations continue to make sense in changed economic circumstances.
Unfortunately, rather than curbing price gouging, since the three percent limit is less than half of the year-over-year inflation in housing, the PG County Law forces landlords to absorb increased expenses.
The PG County Law also may make it difficult for landlords to recoup increases in uncontrollable costs, such as real estate taxes. Department of Assessments and Taxation (SDAT) reassesses real property every three years, and each county is divided into three geographic groups for reassessment. SDAT reported a 12.0% increase in its 2022 reassessment of Group 1 residential and commercial properties and an overall increase for all groups of 12.0% during this reassessment cycle. A three percent rent increase limit won’t cover these tax increases unless landlords make cuts elsewhere.
Another challenge facing many landlords is interest rates. In recent years, landlords with adjustable-rate mortgages may have experienced significant, uncontrollable debt service increases. Lenders may foreclose if properties don't generate sufficient revenue to cover the mortgage loan payments.
Without sufficient revenue, landlords are likely to make cuts in controllable expenses, such as amenities, employee wages, and non-essential repairs and maintenance. So, PG County stock may experience a decline.
Also, landlords may defer capital improvements, including important health and safety upgrades, such as adding sprinkler systems to buildings constructed before the code required them. Again, fortunately, the PG County Law expires after one year, so the decline may only be temporary.
Pros and Cons of Rent Control Generally
Local governments often adopt rent control because they are concerned about preventing homelessness. Rent control can help individuals remain in their apartment homes. Tenants on fixed or low incomes that don’t keep pace with inflation may not have savings or excess income to absorb rent increases. As a result, they may be forced to move or unable to afford housing at all if their rent increases more than their income.
Rent control may also keep housing within reach as families grow. Without rent control, a tenant may attempt to remain in a small apartment despite adding more children to their family.
However, utilizing economic legislation to promote social ideals can have undesired results. When rent control laws limit landlords’ potential for revenue growth without regard to market factors of supply and demand, landlords may be forced to cut amenities or defer maintenance. Further, rent control limits financial opportunity and may interfere with the real estate cycle on a local level by disincentivizing developers from adding new rental units even though local market apartment demand outstrips supply. Ultimately, rent control can increase scarcity and make it more difficult for people to find housing – the opposite result the legislators likely desired.
Rent control laws also can significantly affect the housing market and the community by disincentivizing property improvements. Landlords unable to recoup the costs of major upgrades have little incentive to advance the cash to make those upgrades. Although tenants might not experience significant rent growth, they may find themselves living in antiquated units with fewer amenities.
When revenue is limited other than by supply and demand, landlords also may be unable to make upgrades that affect health and safety but are not required by code. For instance, owners of older buildings might be unable to add hard-wired smoke detectors or upgrade smoke detectors with more reliable, 10-year batteries.
While local rent control may appeal to voters, it may discourage developers from building in an area. Or it may make it difficult for owners to sell buildings and keep values, making real estate tax revenues lower.
Mount Rainier’s and PG County’s laws don’t apply to newer properties. PG County's exclusion of properties completed in the past five years provides developers ample time to stabilize new properties for sale. So, PG County’s law may encourage new development. So, the exclusion may incentive development, but at the expense of maintaining and renovating existing housing stock.
Conclusion
Rent control measures can provide relief to fixed- and lower-income individuals who can’t afford increased rent. However, rent control doesn’t prevent a landlord from evicting a tenant who doesn’t pay rent because they can’t afford it.
Despite this short-term benefit, rent control also can force landlords to reduce staffing, amenities, and property maintenance. And rent control may delay health and safety improvements.
Rent control laws also can disrupt the real estate cycle on a local level. When supply and demand don’t dictate rental rates and market growth, local economies with rent control might not keep pace with national economic trends. The short-term benefit local legislators sought might discourage investment and development in that locality, which reduces tax dollars to fund the local government.
This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.
