New Jersey's largest city is putting limits on rent increases for new apartments that previously were exempt from rent control, a local move to deal with a nationwide shortage of affordable housing that area officials say will keep housing more affordable and landlords argue with chill multifamily development.

The Newark City Council approved an ordinance that aims to bar rent hikes of more than 5% in a single year at newer multifamily properties that are not covered under the city's existing rent control regulations. In a statement on the ordinance, Mayor Ras Baraka's office said it is built on a state anti-eviction law that makes it illegal for a landlord to impose a rent increase so large that it is "unconscionable."

From New Jersey to California, state and local officials are grappling with ways to address the issue of a dearth of housing without high costs in the face of increasing gentrification. City officials said the new ordinance protects the poorest Newark residents who are without rent control and don’t live in public housing.

Newark is experiencing a boom of luxury apartment projects, housing that many longtime residents, who spoke at this week's council meeting, said they can't afford to live in. And a number of institutional buyers are acquiring residences in the city, and they will be jacking up rents to make money for their investors, according to at least one expert.

But trade groups representing multifamily landlords questioned the legality of the "unconscionable" rent increase ordinance, arguing that it attempts to override state law. In addition, landlord advocates said that the new 5% rent cap may discourage real estate developers from planning to build more multifamily projects in the city for fear of not making back their investments.

The ordinance is “going to face scrutiny ... There’s going to be a legal challenge,” Derek Reed, a Newark attorney and past president of the Property Owners Association of New Jersey, told CoStar News on Thursday. "If I’m a developer in Newark, I’m going to take a step back and say, ‘OK, what other places can I develop.’ … It’s going to have a chilling effect on that type of housing. ... It’s baffling to me.”

Under a New Jersey law passed in 1987, new multifamily properties are exempt from local rent control regulations for 30 years or the length of their financing. That legislation was meant to encourage housing construction, Reed said.

But state law also says that towns can protect tenants from "unconscionable" rent increases. The law doesn't define what constitutes unconscionable, leaving it to the courts to make determinations on a case-by-case basis.

“What this ordinance is attempting to do is kind of impose a definition of what a reasonable rent increase is, but I’ve never seen anyone attempt to do that, No. 1, and No. 2 … this has got some dubious legality,” Nicholas Kikis, vice president of legislative and regulatory affairs for the New Jersey Apartment Association, a trade group for landlords, told CoStar News on Wednesday. “This ordinance is essentially a 5% rent-increase cap."

Kikis, who testified at the council meeting, and Reed both said Newark can't preempt state law with its ordinance.

“As an attorney, I was somewhat taken aback at the ordinance," Reed said, because the Legislature "went to great lengths" to specifically bar newly constructed multifamily buildings from local rent control in order to encourage development.

"So, this flies in the face of the state legislators’ both legislative intent in that statute and specific language in that statute,” Reed said. "They’re imposing rent control on buildings that are specifically subject to exemption under state law.”

Newark's existing rent control regulations, applying to older housing, cap rent increases to the Consumer Price Index or 4% whichever is smaller. At the council meeting, Newark Deputy Mayor Allison Ladd said those rent control rules cover just 70% of the apartments in the city.

With three-quarters of Newark residents being renters, the new ordinance gives them "another level of protection," according to Ladd.

But rents in the greater Newark area, which includes that city and Irvington, haven't seen big increases, according to a report on the region by CoStar.

"While it boasts the largest inventory in Northern New Jersey, Greater Newark's asking rents are the lowest among all the metro's submarkets, owing largely to the aging stock that still dominates the city," the report said. "In fact, approximately 90% of the units were built prior to 1980 and are devoid of the amenities desired by today's renters, drastically limiting what landlords can expect to charge."

Despite those challenges, rents have been increasing, but not much, according to CoStar.

"Rents have been rising at 2.5% annually as of the second quarter of 2023, buoyed by historically tight vacancies," CoStar's report said. "That pace is down from a peak of 3.6%" in the third quarter o 2022, "though rents are expected to continue rising at a 2% rate annually through the middle of the decade."

There is a significant pipeline of apartment developments slated for Newark, including projects from high-profile city natives such as entrepreneur and retired pro basketball star Shaquille O'Neal and actress-singer Queen Latifah. CoStar has forecast that roughly 3,500 apartment units will come online in greater Newark between this year and 2025.

"Driven by high-end stock, asking rents have risen a respectable 9% over the past five years to about $1,450 per unit though they are still roughly $600 below the broader Northern New Jersey metro's levels," according to CoStar.

Much of the existing population many not have the means to move into these new developments, as 26% of the population in Newark is under the poverty line, according to CoStar. City officials said they are trying to help those residents.

“Newark faces a crisis of affordability," Mayor Baraka said in a statement. "The value of property in Newark is increasing rapidly. Landlords are charging rents of over $2,000 for one-bedroom apartments in areas where they were just $750 five years ago. Thirty percent of the rental housing in Newark is not under rent control, and there is presently no penalty for how much a landlord can increase those rents.”

Under the new ordinance, violations would be met with fines of up $1,200 for each apartment.

The City Office of Tenant Legal Services, which provides free legal services for low-income tenants facing eviction, reported that low-income tenants have faced rent increases of as much as $945 in the East Ward, $816 in the South, $750 in the Central, $550 in the North, and $445 in the West, according to the mayor's office.

City officials also said Newark's supply of affordable housing is being eroded by companies that are buying up owner-occupied homes and turning them into high-priced rentals.

Purchases of residential properties in Newark by corporate entities is already causing rents to rise and owner-occupancy to fall, according to a research study by David Troutt, director of the Rutgers Center on Law, Inequality and Metropolitan Equity. The study found that 47% of home sales were to institutional-investor buyers from 2017 to 2020.

Troutt appeared at this week's council meeting to discuss the new ordinance.

"For some, this might be radical," he said. "For some, not radical enough."