Rent Control, a California Nightmare
It is almost assured that Proposition 10 will pass, and the state of California will become a free for all with different, complex and in many jurisdictions, nonsensical rent control policies. The biggest risk for apartment owners and developers is risk of the unknown.
The voters of California are set to vote for a new nightmare called statewide rent control, when they go to the ballot box on Election Day on November 6, 2018. On the ballot in California will be Proposition 10, “Local Rent Control Initiative.” If approved, Proposition 10 will allow local governments to adopt any type of rent control system, repealing the Costa-Hawkins Rental Housing Act (CHRHA) of 1995.
The CHRHA is a 1995 state statute that limits the use of rent control in California and provides that cities cannot enact rent control on (a) housing first occupied or built after February 1, 1995, and (b) housing units where the title is separate from connected units, such as condominiums and townhouses. CHRHA also provides that landlords have a right to increase rent prices to market rates when a tenant moves out and this is called “vacancy de-control.” Prior to the enactment of CHRHA, local governments were permitted to enact rent control, provided that landlords would receive just and reasonable returns on their rental properties.
This ballot measure has been pushed and promoted by the California Democratic party and various affordable housing groups and is primarily the result of the following housing issues:
- Lack of affordable housing throughout the state
- Decades of underdevelopment of new housing due to environmental opposition to new development, NIMBYism (not in my backyard) and extensive delays and bureaucratic red tape in obtaining entitlement and development rights
- Surging rents, which is some hot markets like Silicon Valley and San Francisco have doubled during the last five years
- Robust job growth, especially in the Bay Area
- Increased demand for rental housing from the millennial generation
- The influx of immigrants (both legal and illegal) seeking affordable housing
It is almost assured that Proposition 10 will pass, and the state of California will become a free for all with different, complex and in many jurisdictions, nonsensical rent control policies. It will be up to individual cities and counties as to whether they want some, all or no rent control and how relaxed or draconian the various rent control provisions will be.
California has over 480 cities and the following currently have some form of rent control, Berkeley, Beverly Hills, East Palo Alto, Hayward, Los Angeles, Los Gatos, Oakland, Palm Springs, San Francisco, San Jose, Santa Monica and West Hollywood. Proposition 10 will allow any city or county to create any type of rent control it desires. Very liberal cities in the Bay Area for example like Santa Clara, Richmond, San Leandro, Concord, and Freemont will undoubtedly enact strict rent control laws. Others that are more market-oriented will probably not enact any rent control laws. But, what about a county that includes both liberal and conservative cities, will it enact rent control? This new proposition will create a mish-mash of laws from one city or county to another and create a hornet’s nest for apartment investors, owners, managers, and developers.
As expected, many groups oppose the proposition including; the California Apartment Association, the California Rental Housing Association, and many public REITs as well as private apartment owners and investors. These opposition groups have raised more than $20 million to fight the proposition, but it won’t have any effect as many residents of the state have seen their rents double or even triple and they want “justice” from the Democrat-controlled state legislature. In California, real estate developers are trusted about as much as car salesmen in plaid jackets.
The biggest risk for apartment owners and developers is risk of the unknown. Subscribers to my View of the Market newsletter are well-aware of our various discussions on the 15 risks inherent in CRE. One of those risks is legal, tax and political risk and this rent control initiative is one of the worst kinds of political risk. Political uncertainty is the worst kind of risk because it can’t be quantified and planned for. Cities that establish new or strengthen current rent control laws will see less investment, property upkeep and new development than areas without rent control. Capital for investment and development will then flow to cities that have no rent control, but investors won’t know, if in the future, a more liberal mayor and city council are elected, and they establish arduous rent control policies. Many public REITs own or control thousands of apartments in the Golden State including; Essex Property Trust, Inc. (38,934 units) and Avalon Bay Communities, Inc. (23,495 units). I have not yet seen any large or wholesale selling of California apartments as many owners, investors and developers are still in a “wait and see” mode, but the future of apartment investment and development in California is very perilous.
Joseph J. Ori is Executive Managing Director of Paramount Capital Corp., a Commercial Real Estate Advisory Firm. The views expressed here are the author’s own and not that of ALM’s Real Estate Media Group.