Rent Cap Makes Sense Now, Multifamily Sellers Say, But There's Danger On The Horizon

When California's rent cap bill made its way through the state legislature, some multifamily brokers in the state expected a flood of apartment listings to hit the market.

California’s AB-1482, which takes effect in January, caps the amount landlords and owners of apartment buildings 15 years and older can hike rent to 5% plus inflation a year. The law ends in 2030, and was heavily promoted by Gov. Gavin Newsom.

The new law will also make it harder for landlords to evict tenants by using “just cause” criteria, meaning landlords must now provide a reason for eviction, such as nonpayment of rent or criminal activity.

In the months leading up to the passage of the bill, many stakeholders were sure of a doom-and-gloom outcome: building owners would start staking “for sale” signs in front of their property, and buyers would cancel deals.

But so far, that type of knee-jerk reaction hasn’t occurred, at least not in Los Angeles, Marcus & Millichap Senior Vice President Investments Jason Tuvia said. 

“One thing we are not seeing are panic sellers,” Tuvia said. “We were expecting an uptick of sellers but we’re not seeing that. I don’t think the bill is as bad as they were expecting … I think people are taking a wait-and-see approach.”

CBRE Executive Vice President Dean Zander said he didn't think AB-1482 would disrupt the multifamily market, because the new law is balanced for both the tenant and building owners.

"AB-1482 provides a level of certainty moving forward," Zander said. "Five percent plus inflation is just about right for tenants. That it is not gouging, and for building owners, it is not too restrictive."

Come January, California will become the third state in the nation to have some type of additional rent regulation. Earlier this year, Oregon passed a bill limiting rent increases to 7% plus inflation a year. In June, New York passed its own rent regulation reform, which eliminated the vacancy bonus, allowing owners to hike rent to a new tenant when a unit is vacated. It also reduces the amount landlords can hike rent after making improvements to the unit.

AB-1482 also hasn't had an immediate impact on the sales listing side, a data analysis from CoStar shows.

CoStar found that there were 855 properties that were listed from Aug. 1, 2018, to Dec. 31, 2018, in Los Angeles. From Aug. 1, 2019 to as of Dec. 4, there have only been 580 listed, according to CoStar.

Bisnow asked to analyze the numbers starting this past August, when it became clear there was already a strong indication from the governor and political mood that AB-1482 would likely pass.

Unless more than 300 properties begin to list from today to Dec. 31, the number of building owners who have listed their property for sale in Los Angeles is actually down. 

Universe Holdings Chief Operating Officer Jonathan Cohen said transactions usually slow down at this time of year. Universe has a portfolio of more than 3,000 multifamily units in Southern California, half of which are subject to rent control.

"We'll have to wait and see the transaction level in the beginning of the year," Cohen said. "Investors and syndicators are still getting comfortable with this law. It doesn't come into effect until next year. Everyone is proceeding cautiously. But as of right now, we're not seeing any major shifts in people's buy and sell strategy."

Cohen said the only impact that he saw during and immediately after the passage of AB-1482 were sellers asking for a small discount in the sales price. Universe Holdings, Cohen said, was in the process of acquiring an apartment building when AB-1482 was about to pass. When it did pass, Cohen said, they asked the seller for a slight discount.

"We had to take a step back and account for the new renewal rates," Cohen said, adding that their offer was accepted. 

Tuvia said the apartment owners and prospective buyers he has spoken with say they can live with the annual 5% plus inflation rent increase. Cohen added that any legitimate operator can operate successfully with the new rent cap. 

A separate CoStar analysis of multifamily properties statewide that are more than 15 years old found that the average annual rent increase was about 2.7%, far below the 5% plus inflation. In the last seven years, only 10% of those properties raised rent more than 5%, according to CoStar.

"[The new law] should provide some breathing room for concerned investors, as above-average rent growth can still be achieved in these older properties," CoStar Portfolio Strategy Senior Consultant Juan Arias said in the report.

For now, one of the biggest concerns is not the short-term impacts of the rent cap, but that the law will not solve the state's ongoing housing crisis, said Arias in a follow-up interview with Bisnow.

Without a way to incentivize new developments, Arias predicts fewer tenants will leave their older rent-controlled properties, essentially shutting out the very people AB-1482 was supposed to help.

"It does not do anything for the low-income households who are still looking for apartments to afford," Arias said, adding that low-income renters who have already found a rent-controlled home will only stay until they are eventually priced out. "This is not the solution to the housing situation. The rent cap law does not do much for them."

Apartment Association of Greater Los Angeles Executive Director Dan Yukelson said there is a far greater concern on the horizon: the hindrance of new developments and an increase in future rent regulations.

Housing Is a Human Right, the housing advocacy division of the AIDS Healthcare Foundation, has already qualified a new rent-control measure called the Rental Affordability Act on California’s statewide November 2020 ballot.

The Rental Affordability Act would allow cities and counties to enact or expand rent-control laws on housing built before 2005, as well as limit the amount an owner can charge when a new tenant moves in. In California, owners are allowed to bring rents to market when a tenant moves out. 

"The fear is that this rent cap is going to ratchet up more and more rent regulation and tenant protection," Yukelson said. "You're already seeing it with all of these cities passing the [no-fault] eviction ordinances to pander to their renters. This is like a gateway drug for these cities. They are going to start implementing their own rent control. This is only the beginning."

Zander is calling the Rental Affordability Act "Prop. 10 2.0," a reference to last year's ballot initiative to repeal the Costa-Hawkins Rental Housing Act, which would have allowed cities to expand their rent control.

The multifamily industry raised more than $100M to defeat the measure. Voters rejected the initiative by a 59% to 41% margin.

Zander said while apartment owners and prospective buyers can live with AB-1482, a new rent-control law could really hurt the multifamily market. In Los Angeles, where job growth remains strong, operators under AB-1482 can still thrive. 

"I'm hopeful that like last year's Prop. 10 failed, that this new version will also be unsuccessful," Zander said.