New Rent Control Law Could Ensure 5% Annual Increases

California’s new statewide rent control law, which caps annual rent increases at 5% throughout the state, could have an adverse affect. According to David Harrington of Matthews Real Estate Investment Services, investors are planning to increase rents the maximum allowed amount, and some owners are even looking to terminate leases with rents well below the market rate. While these trends are necessarily indicative of an industry-wide perspective, it shows this new law could have unintended consequences.

“In the days following the senate and assembly’s passing of AB 1482 we have had many meetings and conversations with clients on this subject,” Harrington, EVP and national director of multifamily at Matthews, tells GlobeSt.com. “They are all considering their options in how to adjust their operations moving forward.  Many of the private investors expressed interest in issuing a 60-day notice to terminate tenancy to those units that are severely below market rents.  This option appears to still be available to an owner at this time, but likely not for long.  Additionally, many of these owners who have not raised rents in many years have indicated that they are now taking steps to implement this maximum allowable increase and have indicated that they will put these tenants on a plan to ensure their rents are raised every single year as allowed by the new law.”

Unfortunately, these moves will impact renters living in low-priced housing and those the most impacted by rent increases. “This will apply pressure to those tenants who have enjoyed below market rents without the threat of increases due to the owner’s passive nature, but this new law is forcing the hand of many owners,” says Harrington.

The new law excludes properties built in the last 15 years, and while many developers have said the law won’t impact the new construction pipeline, Harrington said that investors could reconsider buying even newer buildings. “A new property being delivered to the market will not be subject to rent control, but keeping rents up with market pricing will be critical to ensure a drop off in rents does not occur over time that could create a delta between current and market that becomes greater than the maximum allowable rent increase,” he says. “This delta will certainly have an effect on the underwriting of the property and ultimately the value.”

Some commercial real estate leaders are cautiously supporting the new bill, while others, like Harrington, believe that it is a poor solution to the housing problem. “This new law is a misguided attempt to solve a housing crisis where the politicians again look to treat the symptom and not the cause,” he says. “If you take the Los Angeles metro as an example of new development statistics, you are seeing mixed signals.  The pipeline of units to be completed looks promising as we are expecting a nearly 50% increase in units being delivered to the market by the second quarter of 2020.  However, as of July 2019, the Los Angeles Metro saw a significant decrease in the number of units permitted from last year with a staggering 28.1% drop.  The drop off is likely due to continued concerns over the rising costs of land, labor and materials, but this new rent control law does absolutely nothing to help bolster investment in new housing starts.”