Is Prop 10 California’s Black Swan Event?

Prop 10 is being described as the biggest threat to the multifamily investment market. The proposition is on the California State ballot in November, and would repeal Costa Hawkins and potentially expand rent control. The proposition is a community response to the rapid increase in rental rates throughout California, but it has multifamily investors and owners severely concerned. In a recent investor sentiment survey from Real Capital Markets, which was overwhelmingly positive, the proposition was among the greatest concerns for investors.

“Prop 10 is probably the greatest threat to multifamily investments, because by giving municipalities the ability to control rental rates, it severely restricts the potential for the high levels of NOI that multifamily investors covet,” Steve Shanahan, executive managing director at Real Capital Markets. “Some investors that were interviewed are more concerned about the passage of Prop 10 than they are about further interest rate hikes.”

Prop 10 isn’t the only concern on investors’ minds. Interest rates are rising inevitably, and it could cause a decrease in investment activity. “Depending on the situation, further interest rate hikes might cause investors to rethink their strategies and approaches to acquisitions,” says Shanahan. “That’s not to say they will forgo their multifamily investing in California; it simply means that they’ll need strategies on how to overcome the increase in debt service payments or be willing to accept a lower yield on their investment.”