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Multifamily on the Ballot

Earlier this year, supporters of Proposition 10, an initiative to repeal California’s Costa-Hawkins Rental Housing Act garnered enough support to put the issue to a vote in the November 6 election. The 1995 law limits the ability of communities to pass restrictive rent control laws, which the legislature determined had a negative impact on local economies. Supporters Prop 10 believe successful passage will address California’s statewide affordable housing crisis. Opponents object to the undue burden it will place on homeowners and the owners of multifamily complexes and believe it may deepen the severity of the crisis.

Some things to keep in mind as Election Day gets closer:

  • The average American spends 26.5% of their income on rent. Residents in seven out of ten of California’s largest cities—Los Angeles, San Diego, San Jose, San Francisco, Long Beach, Oakland, and Anaheim—spend a higher amount, with an average annual expenditure of 35.5% of annual income. These cities, especially Los Angeles, San Francisco, and Oakland, where the number of Democrats hovers around 60% of registered voters, and where housing stock tends to be older, are especially likely to enact rent control laws if voters choose to repeal Costa-Hawkins.
  • Some California-centric investors are reworking their acquisitions strategies in an effort to get ahead of a potential vote to repeal. By targeting acquisitions in cities like Alameda, which recently passed new rent control laws, Universe Holdings hopes to enter markets where the situation for multifamily owners “couldn’t get any worse.” The company has also begun hunting for market-rate deals outside of California in states including Colorado, Utah, and New Jersey, where there is no threat that punitive rent control laws might come online and where the potential for upside and rent growth is higher. Even if Costa-Hawkins remains on the books, diversifying geographically guarantees long-term insulation from any potential downturn in California.
  • Restrictive rent control laws will dissuade developers from building new market-rate housing stock, instead of creating incentive to build more luxury housing due to higher profit margins. Ground-up development is already speculative, and developers face more challenges than investors do, and building new housing to operate it without guaranteed rent growth is a no-win situation. Although rent control may improve the situation for current tenants in the short-term, it endangers the long-term pipeline of new housing, another crucial way of relieving the current affordability crisis.
  • Even if Proposition 10 succeeds, new rent control laws will not appear overnight. Removing state-wide restrictions will empower local municipalities to take their own legislative approach to affordable housing, and each city will move at a different pace, assuming they move at all. As Los Angeles mayor Eric Garcetti made clear, Prop 10 is more about securing local control over housing than about the quick passage of legislation.
  • Repeal supporters argue that companies like Invitation Homes, who purchase thousands of single family homes, have exploited a provision of Costa Hawkins that prohibits rent control laws that apply to single family homes, which was intended to help smaller property owners. Opponents of Proposition 10 argue that removing this provision could cause the value of single family homes to decrease in value by 10 percent overnight – a nightmare for investors, and lost tax recvenue for the state.

If Proposition 10 passes on November 6th, no change will occur right away. Cities throughout the state will take time to discuss and enact legislation, resulting in some markets remaining friendly to investors, without meaningful rent control statutes. Other cities, particularly those with disproportionately Democratic voters, will pass stronger versions of their current Costa-compliant regulations. This change will be slow, but it will result in a fractured California with dozens of conflicting statutes. Navigating them won’t be easy. If the repeal goes through, while owners and investors are likely to benefit, it will come with some unintended consequences, too – stock up on Tylenol, because the headaches sure to come.

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