Nation's Biggest REITs Are Spending Millions To Stop This 'Slippery Slope’

California's newest proposed rent control measure could be only a moderate hit to the profitability of the state's biggest apartment owners, but that isn't stopping some of them from spending millions of dollars to defeat the plan.

Through this week, Proposition 21, a ballot measure that would allow cities to establish rent control on many units over 15 years old, has seen over $60M combined contributed toward campaigns for and against it. The Yes on 21 campaign has received about $24M, almost all of which has come from its main sponsor, AIDS Healthcare Foundation, while the No on Prop 21 campaign, which is backed by the California Apartment Association, has received about $43M, much of which has come from REITs Essex Property Trust ($6.6M), Equity Residential ($5.5M) and AvalonBay Communities ($4.4M), according to public campaign finance records.

For those apartment owners, none of which responded to requests for comment, the motivation behind their opposition to Prop. 21 likely goes beyond concerns about an immediate hit to their valuations, experts said.

Two other major rent control and property valuation plans have met with varying successes. Prop. 10, a similar 2018 measure, was proposed but failed, while a semi-related measure, Assembly Bill 1482, took effect this year, both of them pushing the state's apartment industry to attempt to stem the tide of rent control measures any chance it gets.

“I think the reason to try to stop it is similar to, say, the [National Rifle Association's] efforts of, don’t give them an inch," Morningstar Equity Analyst Kevin Brown said. "I think they’re afraid of a slippery slope.”

Brown, whose analysis includes the three above-mentioned apartment REITs, said Prop. 21's effects on company valuations will vary by how much weight California has in a given portfolio. For Equity Residential, for instance, it could mean a hit to company valuation of 1% to 2%, while for Essex Property Trust, which owns properties only in California and Washington, it could mean a hit of up to 5%, Brown said. 

“The overall impact to companies is going to be fairly minor in the long term because eventually each property will get itself back up to market rent," he said.

Even then, share prices for REITs might go unchanged. When New York enacted new statewide rent control legislation last year, apartment REITs like Equity Residential and AvalonBay Communities reported 25- to 50-basis-point reductions on their rental growth rate, according to Bloomberg Intelligence Senior REIT Analyst Jeffrey Langbaum. But effects since then have been limited, he said.

"That slowed their revenue growth in the back half of 2019 from what it would have been, had the rent control not gone into place, but the stock prices never really missed a beat and didn’t really reflect much of that slowdown," Langbaum said. 

In arguments against the measure, the No on Prop. 21 campaign cites economic research that supports the idea that rent control creates a disincentive to housing production and would worsen the state's housing crisis. 

René Christian Moya, campaign director for Housing Is A Human Right, the housing advocacy division of AHF, called the opposition "no surprise," saying that "the exact same players opposing Prop. 21 opposed Prop. 10 two years ago."

"We know that they are going to try to spend whatever they think it takes to stop us," Moya said. "Obviously, they think Prop. 21 is bad for their business model, and their business model is the business of gouging the renters of California to make a quick buck off the backs of California residents.”

No on Prop. 21 spokesperson Steven Maviglio said it is "political malpractice" for AHF to be pushing for another rent control initiative after Prop. 10's doomed outcome two years ago. He also said the breadth of the opposition to the latest measure is a positive sign. 

“[California Gov. Gavin Newsom] and the California Republican Party and the building trades union don’t agree on much, and they agree on this," he said. "That speaks to the bandwidth of our opposition.”

Polling shows Prop. 21, at least recently, lacking the simple majority it needs to pass and be enacted. Last month, a UC Berkeley Institute of Governmental Studies survey showed 37% likely voter support, 37% opposition and 26% indecision.

Moya said their group is committed to a fight even beyond November, despite the strength of the opposition. 

“If it doesn’t pass this time around, it is not because rent control isn’t popular and people don’t want more of it. They do," Moya said. “The problem, of course, is the opposition to Prop. 21 is an immovable object in the way of that. If the opposition to Prop. 21 thinks that we are going to stop, win or lose in November, they have another thing coming.”