Recapping AOBA's State of Rental Housing in Suburban Maryland Series

Back in March, AOBA kicked off a six-part series analyzing the state of multifamily rental housing in Suburban Maryland.

The bottom line: Suburban Maryland's rental housing stock is struggling under the stress of skyrocketing operating expenses, declining rent collection, and new layers of burdensome regulatory requirements. 

Included below is a summary of each part of this series, accompanied by short video explainers. 

📈 Part I: The Cost of Operating Rental Housing is Too Damn High

Suburban Maryland rental housing providers face mounting challenges as the cost of providing housing skyrockets.

Why it matters: Rising costs are squeezing profit margins, impacting the sustainability of rental businesses, and deterring new investments in the area.

• High expenses threaten the availability and quality of rental housing in Montgomery and Prince George’s Counties.

📊By the numbers:

• Water and sewer rates increased by 60% in July 2024.

• Natural gas prices nearly doubled in October 2022.

• Electricity bills saw a 51.5% rise from 2020 to 2023.

• Insurance rates jumped 26% in 2023. From 2019-2024, they nearly doubled.

• Real estate tax assessments rose 14% and 23% in Prince George's and Montgomery Counties in 2024, respectively.

Cost increases of this nature exacerbate affordability challenges and harm housing quality, especially with rent control, and more importantly, vacancy control, in effect in both Montgomery and Prince George’s Counties.

Dive Deeper: Read Part I in full.

😟Part II: Rent Control's Unintended Consequences

Rent control policies in Montgomery and Prince George’s Counties were intended to address housing affordability, but are now driving developers away.

Why it matters: New housing investments have sharply declined, impacting our housing production goals.

• These policies have inadvertently increased housing costs for renters in Suburban Maryland.

📊By the numbers: The pandemic caused economic volatility, but even as consumer prices soared, market rents rose by only 7%—less than the 9% inflation peak.

• The market then self-corrected to a modest 2-3% annual increase before rent control laws were passed.

• Rent increases have paradoxically risen due to regulations, as housing providers take the maximum allowable increases to hedge against future spikes in expenses.

The bottom line: Rent regulations, meant to cap rent increases, tend to set a floor, countering community housing goals and straining local housing providers and renters.

Dive Deeper: Read Part II in full.

🚀Part III: Skyrocketing Rent Delinquency Fuels Uncertainty

Plummeting rent collection rates and prolonged court delays are harming rental housing communities.  

Why it matters: Rent is the sole revenue source for housing providers.

• Elevated levels of rent delinquency impact the ability of housing providers to cover expenses and make loan payments.

• It also puts pressure on housing providers to increase rents to cover losses or defer non-essential maintenance and capital improvements.

🔍Zoom in: Since the pandemic, rent delinquencies have surged, with some properties reporting a loss of nearly $2 million in 2024. 

• One AOBA member property, a 320-unit workforce housing community that offers rents significantly below market rates, saw rent delinquency grow to $664.52 per unit, roughly 50% of the average rent for the entire community.

📊By the numbers: The cost of an eviction for a typical two-bedroom apartment in Montgomery County is $12,570. In Prince George’s, it’s $15,318.

Court backlogs are exacerbating the situation, adding to the financial strain.

• In Prince George’s County, eviction timelines extend over nine months, compounding income loss for housing providers.

• Efforts to streamline judicial processes are underway; however, challenges persist.

Dive deeper: Read Part III in full.

💲Part IV: Regulatory Costs Stack Up

Housing providers must comply with several new regulatory requirements across Suburban Maryland, including Building Energy Performance Standards (BEPS), fire safety upgrades, and security camera requirements.

• Problems arise when laws and regulations implementing such priorities are designed in ways that significantly increase operating costs and provide insufficient flexibility.

Financial impacts: BEPS compliance costs may reach $28,300 per unit, with security camera requirements adding $65,000 annually.

• The Maryland General Assembly Fire Safety Workgroup has recommended that all apartment buildings be retrofitted with sprinklers.

• A Jensen Hughes study of one affected property projected that retrofitting the building with sprinklers would cost $9,826 per unit, requiring a pass-through rent increase of approximately $82 per month, or 4.1%

Market consequences: Proposed costs could lead to significant rent hikes, impacting the viability of affordable housing and chasing away investments.

Dive Deeper: Read Part IV in full.

🏢Part V: How Real Estate Investors Assess Potential Projects

Suburban Maryland's housing challenge: The region needs 320,000 new apartment units by 2030, with 75% of those units affordable to low- and middle-income households. Public and private sectors must partner to attract new housing production.

Investor considerations: Investors weigh factors like housing demand, building costs, and regulatory environments.

• Additional factors include availability of financing, regulatory stability, and community assets.

• Investors seek a yield on cost of around 7% to ensure sufficient return on investment.

• Operating costs and regulatory mandates impact the yield on cost.

The bottom line: Suburban Maryland faces challenges with increasing CAP rates and regulatory costs, making it less attractive to investors compared to Northern Virginia.

Dive deeper: Read Part V in full.

Part VI: Rental Housing Reality Check

The state of Suburban Maryland’s rental housing market post-pandemic is decidedly negative.  Over the last five years, rental housing providers have been faced with:

• Extreme inflation and sharp increases in operating expenses

• Market and policy constraints on revenues

• Heightened delinquency and reduced access to legal remedies through elongated court timelines

• A string of hostile state and local policies resulting in a layering of new administrative costs and regulatory compliance burdens on housing providers

The bottom line: The regulatory environment impacts the industry’s capacity to expand housing supply.  If we wish to meet our housing production goals and foster long-term housing affordability, policymakers must address the foundational regulatory and policy factors that drive up rental housing operating expenses and drive investors away.