California Rent Control: Smoke Without a Fire?
Despite many industry analysts warning of a multifamily apocalypse across California, the state’s rent control laws do not appear to have had the predicted impacts.
Los Angeles’ skyline. Image by Sterling Davis from Unsplash.
Is Rent Control In California Harmful?
It’s no secret that most multifamily industry advocates are staunch opponents of anything resembling rent control measures. Take California’s statewide rent control law, Assembly Bill 1482, or the Tenant Protection Act of 2019. This measure went into effect Jan. 1, 2020, and right before and after, many op-eds decrying burdensome government intervention hit the wire, and a number of senior industry figures predicted that investment dollars toward multifamily assets in the state would free fall.
In short, that hasn’t exactly happened.
While Multi-Housing News reported that 55% of surveyed investors were avoiding investment activities in the state, data paints a different picture. Multifamily investment in Los Angeles, specifically, hit $18.6 billion during the year ending in March 2022, according to a CBRE report, 122% above the volume for the prior year. This volume, already accounting for 5% of total multifamily transactions across the country, is expected to soar even higher. This begs the question: Why would so many investment dollars be flowing into California apartments, especially as borrowing costs escalate alongside increasing interest rates?
Simply put, the type of rent control enacted in California is not so far reaching. While it does limit annual rent increases, the cap on rent growth is pegged at the lesser of 5% plus local inflation or 10%. Considering that rents in most California markets rarely got anywhere even close to that prior to the pandemic, this was hardly the imposition many made it out to be.
Even with the massive rental growth rebound that occured after the initial shock of the health crisis, Los Angeles’ rents grew 12.7% year-over-year through April 2022, according to Yardi Matrix’s latest multifamily report, an event unlikely to carry on into perpetuity.
You might ask: How did rent growth for the market exceed that 10% statewide maximum? Well, besides its fairly generous allowance for rent increases, the law also doesn’t apply to any property built in the last 15 years. This exclusion, which impacts a large percent of California’s multifamily inventory, was added to the law to ensure development activity would continue apace in the Golden State.
After all, creating affordable housing is about far more than controlling rents: It also needs development activity to increase the number of units available. Right now, with a housing shortage irrespective of rent costs, just keeping expensive rents from getting more expensive isn’t the only tool in the box.
Unfortunately, this could be the larger problem. Marcus & Millichap’s second-quarter Los Angeles multifamily outlook shows that, while more than 10,000 apartments are slated to come online this year, it’s still nowhere near the amount to meet demand in the urban core:
Sparse vacancy warrants supply additions; however, Greater Downtown will record a decline in completions this year, with Santa Monica the only Westside locale to add more than 500 units. Moderate completion volumes in both regions, coupled with higher-paying job growth, will ensure new units are well received and tight conditions preserved this year.
Marcus & Millichap Market Report, Los Angeles Metro Area 2Q/22"
Financing vehicles’ rises in costs could lead to an even greater slowdown in multifamily construction going forward, particularly as building material and labor shortages continue to drive development costs higher and higher.
What are the implications of California's rent control laws?
California's rent control laws have limited impact on rent growth. The cap on rent growth is pegged at the lesser of 5% plus local inflation or 10%. This has not deterred investment dollars from flowing into California apartments, as multifamily investment in Los Angeles hit $18.6 billion during the year ending in March 2022, according to a CBRE report. This suggests that investors are not deterred by the rent control laws.
How do California's rent control laws affect landlords?
California's rent control laws limit annual rent increases to the lesser of 5% plus local inflation or 10%. This is not as far reaching as some may have thought, and the rental growth rebound after the pandemic has been significant. According to Yardi Matrix's latest multifamily report, Los Angeles' rents grew 12.7% year-over-year through April 2022. However, this is unlikely to carry on into perpetuity.
Overall, California's rent control laws have had a limited impact on landlords.
What are the benefits of rent control for tenants?
Rent control can provide tenants with a number of benefits, including more stable and predictable rent payments, protection from sudden rent increases, and more security in their housing situation. According to Nolo, rent control can also help tenants avoid displacement due to rising rents, and can help ensure that landlords maintain their properties in good condition. Additionally, rent control can help tenants save money on rent, as rent increases are limited to a certain amount each year.
How does rent control affect the availability of affordable housing?
Rent control can have both positive and negative effects on the availability of affordable housing. On the one hand, rent control can help to keep rents affordable for existing tenants, which can help to reduce displacement and homelessness. On the other hand, rent control can also discourage new development, as developers may be less likely to build new affordable housing if they are unable to charge market-rate rents.
For example, the California rent control law mentioned in the article does not apply to any property built in the last 15 years, which could encourage development activity and increase the number of units available. However, the Marcus & Millichap report cited in the article also notes that completion volumes in both regions are still not enough to meet demand in the urban core.
Overall, rent control can help to keep existing affordable housing units affordable, but it may not be enough to address the larger issue of a housing shortage. Other measures, such as increasing funding for affordable housing development, may be needed to increase the availability of affordable housing.
What are the potential drawbacks of rent control for landlords?
The potential drawbacks of rent control for landlords include reduced rental income, difficulty in evicting tenants, and difficulty in raising rents. Rent control limits the amount of rent that landlords can charge tenants, which can reduce rental income. Additionally, rent control laws often make it difficult for landlords to evict tenants, even if they are not paying rent or are violating the terms of the lease. Finally, rent control laws can make it difficult for landlords to raise rents, even if the market rate for rent has increased.
How does rent control impact the value of rental properties?
Rent control can have a variety of impacts on the value of rental properties. According to a 2012 study from Polk County, Iowa, rent control can lead to a decrease in property values, as well as an increase in crime and the addition of poorly maintained “eyesores” in homeowners’ communities. However, a Yardi Matrix report found that the type of rent control enacted in California is not so far reaching, and that rents in most California markets rarely got anywhere even close to the cap on rent growth prior to the pandemic. Additionally, a 2020 report from San Diego State University found that the fears of rent control leading to a decrease in property values may not be based in reality.