Rent control produces strong opinion. On one side are those who see it as a tool to protect the poor from housing cost increases. On the other are those who see it as ineffective in what it purports to achieve but very effective in producing unintended consequences: elderly retirees subsidizing the rents of their doctor and lawyer tenants; and owners who are forbidden to live in the condominiums that are theirs. Try explaining that last one to your cousin from the Midwest. Those Massachusetts residents who care to take sides may have an opportunity to express their views come November, when a referendum on the rent control enabling act is likely to be on the statewide ballot.

Rent control is not unique to Cambridge, but it is certainly strongest here, in comparison to neighboring communities that have either abolished it (Somerville) or allowed its slow death through vacancy decontrol (Boston and Brookline). Rent control was initiated in the late 1960s in response to a perceived housing shortage that allowed landlords to hike rents. By capping rent increases, controls made regulated units even more desirable to tenants, exacerbating the shortage and creating a continuing need for controls. Affected properties are all non-owner-occupied residential buildings and buildings of four or more units that are not exempt by virtue of "new construction" status or other means. Maximum rent levels are set for individual units on the basis of those units' rents in 1970. Increases are gained either through general adjustment, available each spring, or through individual adjustments to reimburse landlords over time for qualifying capital expenditures, to provide an incentive for upkeep. Removal of units from controls is difficult. To prevent a decline in the number of units on the market, the Rent Board over the years has instituted a long list of prohibitions, including those that can make it a crime not first to obtain the Board's approval to demolish a controlled building; to leave a unit vacant for more than 120 days; or, for a condominium owner, to live in it.

Investment Performance
All the ingredients are there for an unattractive investment: a cap on rents but none on expenses, thick layers of bureaucracy, and a balance tipped in favor of tenants in landlord/tenant disputes. Early on, the effects could be seen. Rents at controlled buildings never really entered the 1980s. High capitalization rates (the cap rate being the overall rate of return) became necessary to attract investors. Low rents and high rates translate into declining prices, and, in fact, during the long residential price run-up of the late '70s and mid-'80s, when the price of non-controlled housing doubled two and three times, the prices of rent-controlled buildings failed to even keep pace with inflation.

Then came the '90s and the crash. For apartments generally, vacancy increased. Rents slid. Capitalization rates rose across the board. The result was that, in a non-controlled neighborhood like Brighton, values declined by half. But in comparison, rent-controlled buildings have fared well. With their rents already suppressed, controlled buildings have suffered no income erosion. Recent sales of controlled buildings ranging in size from 30 to 90 units demonstrate cap rates ranging from 8.6% to 9.0% actually below rates of 9.0% to 12.0% for seemingly better-quality buildings in the suburbs. One cause of the reversal may lie in speculation of a removal of controls. Another may be a perception of relative safety. Well insulated from rent erosion, controlled buildings may be more attractive than erodable, market-rate property. In a final unintended consequence, it appears that the effect of controls during the 1990s has been to enhance the owners of rent-controlled buildings' financial security.

-Jose R. Guzman and Eric T. Reenstierna

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Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.


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