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The Future of Rent Control in California

Background

The country’s affordable housing crisis continues, and California has become a battleground. Competing solutions proposed by NIMBY and YIMBY activists, tech companies, and politicians have entered the public consciousness, all while the increasing threat of wildfires reduces housing stock. In 2018, Proposition 10 failed to pass, leaving Costa-Hawkins on the books and preventing municipalities from setting their own rent control laws. Governor Gavin Newsom pledged on the campaign trail to expand housing permits and expressed support for SB-50, and has now passed a new set of reforms designed to lessen the crisis.

Legislative Changes

In the middle of September, California lawmakers approved Assembly Bill 1482, a rent control measure that would cover the entire state. Governor Newsom signed the bill on October 8. When the law takes effect on January 1, 2020, it will:

  • Limit multifamily owners to a 5% rent increase each year for residents, with deference to local provisions when preexisting rent control laws in place have more stringent requirements
  • Require that landlords have just cause when pursuing eviction
  • Permit vacancy decontrol, allowing owners to return a unit to market rates when a tenant vacates

Some eight million renters will see their next lease impacted by the law, but the bill has not left everyone happy. Some to the left of the bill’s author, Assemblyman David Chiu, have indicated their frustration that Newsom signed AB 1482 instead of delivering a central campaign promise: a comprehensive plan to provide 3.5 million new residential units in the state. Owners, meanwhile, have expressed concerns about their inability to raise rents. Multifamily professionals can take some comfort in the fact that AB 1482 will expire in 2030, and that it applies only to buildings older than 15 years. Additionally, the law will not apply to “mom-and-pop” investors who own a portfolio of single-family homes—only institutional owners of single-family stock will need to comply with the law. The inclusion of these provisions and the overall tame nature of the reform program has meant that some organizations, like the California Apartment Association, have tacitly supported the bill in an effort to stave off more stringent reforms.

Going Forward

Investors with assets in California should prepare for 2020. Single-family companies such as Invitation will need to reconsider their business models, as they tend to rely heavily on steep rent increases. While multifamily may have fewer considerations, those who rely on value-add may need to rethink their strategies. AB 1482’s regulations only apply to buildings more than 15 years old. As a result, those investing with the intent to may be compelled to turn to the acquisition of new developments where lease-over-lease rent increases do not face regulation. This approach does come with risks, however. AB 1482 could expire with no clear replacement legislation, meaning a favorable environment for a sale of a market rate asset, or future lawmakers could replace the bill in 2030 with even stricter laws. No matter the outcome, rent increases in the meantime remain permitted.

While smart investors keep their eyes on the legislative pipeline, they will do well to look out for a new competitor: tech companies. Faced with criticism that their highly paid workers have forced out locals and driven up cost of living in San Francisco and the rest of the state, companies such as Google and Apple have pledged to combat the problem. While these conglomerates will not give their cash reserves away—the $2 billion Apple pledged last week would mostly take the form of loans—it still means new, private players in the housing sector against whom incumbents will need to compete. As public, private, and environmental forces change the investment landscape in California, diversifying into neighboring states will help buoy profitability.


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