Denver would lose 17,000 units by 2030 as a result of rent control

Key Findings

The housing supply deficit in Colorado of over 100,000 units contributes to Colorado’s low affordability. A bill known as HB23-1115 proposes to repeal the state’s ban on local governments enacting rent control. Unintended consequences of rent control have been widely debated for decades, with mounting evidence now showing large unintended consequences.
Rent control has been found to be disruptive to markets and inadequate for resolving housing affordability generally in cities that have implemented it. In the long run, it will result in reduced housing supply, limited mobility, and higher rents.
By 2030, Denver would lose 16,547 housing units at 3% rent control or 9,348 units at 7% rent control if rent control passes. Consequently, the city would not be able to construct nearly 56,000 housing units by 2030 to fill the existing supply gap and meet future demand.
Rent control not only impacts housing supply, but also decreases the value of both regulated and nonregulated properties. According to NAA estimates, Denver’s apartment buildings alone would lose an estimated $462.2 million in property value under a 7% annual rent increase cap, resulting in a $2.6 million reduction in property tax revenue.

About HB23-1115

For Coloradans who have experienced rising rent costs as well as abnormally high inflation, affordability and supply are top concerns. Legislators have introduced HB23-1115, which, as introduced, would repeal provisions prohibiting local governments from enacting rent control on private residential properties. A provision in HB22-1287 was included in 2022 to allow rent control for manufactured home parks owned by third parties. This provision was removed from the bill before passage after CSI issued an analysis of the provision and Governor Jared Polis threatened to veto it.

There is already an amendment to HB23-1115 that specifies landlords may still raise rents at least 3% plus inflation annually, and no rent control regulations will apply to buildings built in the last 15 years.

Rent control’s unintended consequences

It is common to discuss rent control as a policy solution to housing unaffordability since it is structured to provide below-market rents to those who cannot afford their rental unit otherwise. Various reports have shown, however, that rent control policies come with a slew of unintended, cost-prohibitive consequences for tenants and cities alike.

Effect on Housing Supply

In particular, rent control policies negatively impact both current and future apartment housing supply.

Evidence of Impacts to Housing Supply from Existing Literature:

A study on rent control in San Francisco found (Diamond, McQuade, Qian, 2018):[iii]
- Compared to non-rented buildings, rent-controlled buildings were 8% more likely to convert to condos.
- Rent-control landlords reduce rental housing supplies by 15% by selling units to occupants and redeveloping buildings.
The study found that since 1993, New York City has lost 130,000 units of rent-controlled housing due to co-ops and condo conversions, expiring tax breaks, and other factors.
In addition to de-incentivizing new construction, rent control regulations also deter builders from investing where these regulations do not exist. There is a 25% decrease in rental units in rent-controlled cities compared to those without rent control, according to a study in New Jersey.
Rent control regulations implemented by a local government have effects beyond city limits. It is evident in New Jersey that enacting rent control impacts neighboring localities through a decrease in supply. By preventing apartments from being listed for rent, these policies create further issues with housing supply and make it more difficult for Colorado residents to move to, or live in, the area of their choice.

The Colorado Quarterly Housing report published in July 2022 estimates that Denver will need 55,963 additional housing units to close the current housing deficit and meet new demand by 2030. There are 43,092 multifamily units estimated among these. The total number of permits in 2022 suggests that the city could meet this target, but rent-control regulations would undermine this progress.

Based on a model developed by the National Apartment Association (NAA) and additional modeling by CSI, the above figure shows how a 3% annual rent cap would impact new apartment construction in Denver. This modeling does not account for the recent amendment to HB23-1115 that prohibits rent control for units younger than 15 years of age. Units less than 15 years old represent approximately 25% of stock, so this change would mitigate some of the potential impacts of the new law.

Based on the modeling results, annual rent caps decrease the amount of new construction within affected areas. A more-restrictive 3% annual cap would result in a 30% reduction in new construction in Denver. Based on the modeling, 16,547 fewer units will be built in Denver by 2030 under a 3% cap than under a 5% cap. There would be 9,348 fewer housing units built by 2030 with a less-restrictive 7% annual rent increase cap than without one.

Effect on Property Values

In addition to reducing housing supply, rent control also decreases the value of both regulated and nonregulated properties. Under a 7% annual rent increase cap, Denver’s apartment buildings alone would lose an estimated $462.2 million in property value. The average mill levy for a residential property in Denver county in 2021 was 79.319. Local property tax revenues will be reduced by $2.62 million due to the residential property assessment rate of 7.15%.

Rent control decreases property values primarily for those who own properties not subject to it. Property owners without any involvement in rent control suffer from this and future institutional investment in the area is discouraged. As a result of reduced property values, not only do property owners suffer, but also local governments that implement rent control lose property tax revenues. In order to accommodate the loss of revenue, local governments that implement rent control policies may need to cut spending or increase taxes.

According to a study conducted in Cambridge between 1994 and 2004, the repeal of rent control increased property values by $2 billion.
Only $300 million of this $2 billion was accounted for by rent-controlled units. Other $1.7 billion in property value was added to properties not subject to rent control.
Autor, Palmer, and Pathak (2014) found that “newly decontrolled properties’ market values increased by 45%.”

While rent control is still being discussed as a policy tool to address housing affordability, the evidence shows that it has a series of long-term negative consequences for housing supply and property values that outweigh any short-term and isolated benefits.

Rent control continues to be a contentious topic when it comes to addressing housing unaffordability. The evidence suggests that rent control can have significant unintended consequences on the housing market, particularly on new housing supply, even though it may seem like a logical solution to rising housing costs. A negative impact on housing supply in Denver, estimated to be 17,000 units by 2030, would be a significant setback in meeting the demand of anticipated future residents and filling the existing supply gap. Legislators should consider all potential consequences as they explore solutions to housing affordability, especially those that undermine long-term goals of the policy.

More information:

[i] C:\1115_01.txt (colorado.gov)

[ii] HB1115_L.004.pdf

[iii] The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco (aeaweb.org)

[iv] Behind New York’s Housing Crisis: Weakened Laws and Fragmented Regulation – The New York Times (nytimes.com)

[v] Forty years of rent control: Reexamining New Jersey’s moderate local policies after the great recession – ScienceDirect

[vi] https://commonsenseinstituteco.org/colorado-housing-quarterly-update/

[vii] https://www.naahq.org/sites/default/files/naa-documents/modeling_the_impacts_of_rent_control.pdf

[viii] https://www.dcpolicycenter.org/publications/rent-control-literature-review/#_ftnref3

[ix] Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts | NBER