“A very dangerous precedent:” Real estate industry reacts to NY’s sweeping rent reform measures

Industry players say NY’s newly-passed rent reform regulations could lead California to take a similar approach, which could erode dwindling housing stock
By Natalie Hoberman | June 14, 2019 05:00PM

From left: Paul Habibi and Henry Manoucheri

From left: Paul Habibi and Henry Manoucheri

Henry Manoucheri, who founded Century City-based multifamily builder Universe Holdings Development, is trying to brace his firm against what he considers are looming and harmful rent regulation legislation.

The writing has been on the wall for California to adopt a tougher rent regulation law, he said, just as New York state did today in passing its sweeping statewide rent reform measure.

If similar rent reforms were enacted in California, Manoucheri predicts landlords would either let buildings fall into disrepair, or simply sell off their assets and move to a more “politically conservative” state.

His firm is already taking precautions.

“We are focused more than ever before to buy in other markets,” he said. “Up to this year, we were purely a California player, but now we have opened it up to the rest of the country. I think anybody today who closes their eyes and keeps growing the way they are growing is making a very big mistake.”

New York’s pending rent reforms come at a time when state lawmakers in California have been struggling to address the statewide housing crisis, which has seen housing costs skyrocket and supply dwindle. L.A. in particular is grappling with a shortage of affordable housing and a rapid rise in its homeless population.

Local tenant advocates and real estate pros interviewed for this story agreed that the changes in New York — which limit how landlords can increase rents on certain apartments, and open the door for those kinds of restrictions on units outside of New York City — could ignite lawmakers in Sacramento to pass a similar measure.

“It’s creating a precedent,” said Brett Lyon, broker and co-founder of El Segundo-based Lyon Stahl Investment Real Estate. “This is a trend and I think New York passing rent control will certainly have an impact on other states as well.”

But the two sides, not surprisingly, differ sharply on whether that reform would be a positive or negative for Los Angeles and the state at large.

Opponents say rent control measures would drive developers and landlords away from affordable housing investment, potentially worsening the state’s housing crisis.

Lyon, whose investment brokerage focuses on multifamily sales, said he’s already seen clients decide “to sell and move their equity of the state preemptively.” In Inglewood, where annual rent increases were just capped at 5 percent, he said landlords are already trying to raise rents before the measures take effect.

“We’re seeing owners that wouldn’t have raised their rents now delivering increases because they’ve been put in a position where they think they’ll be negatively impacted down the line,” Lyon said.

But while the real estate industry may tremble at the possibility of more restrictive rent laws in California, housing advocates are hopeful about the same kind of landmark reform measures.

Larry Gross, executive director of the Coalition for Economic Survival — a nonprofit that advocates for low- and moderate-income residents in L.A. — said he applauds New York for its progressive move.

“I know a lot of legislators think that what California does, the rest of the country follows,” Gross said. “But in this case, it seems like we’re riding in the caboose while New York is in the engine.”

Manoucheri, of Universe Holdings, said New York’s rent reform regulations will set “a very dangerous precedent.” What will it mean for California? He said it was “inevitable that something drastic is going to happen.”

Over the years, California’s powerful real estate industry has successfully opposed statewide efforts at sweeping rent regulations, most recently with last November’s defeat of the Proposition 10 referendum. But in the L.A. area, that loss has also prompted a slew of local municipalities, such as Long Beach and Inglewood, to pass their own temporary rent reform measures aimed at protecting tenants and addressing the rising cost of housing.

Housing advocates applaud those efforts, and say if sweeping reform was passed in California, developers would continue to build, and to make money.

“We’ve been hearing the same story for 40 years,” Gross said, referring to developers who oppose stronger rent regulations. “The fiddles are playing again.”

Paul Habibi, a University of California Los Angeles professor and himself a real estate investor, said he is against rent control. But, he anticipates New York’s new regulations will create momentum.

“I hate to say it but it’s probably going to create more tailwind for these initiatives,” Habibi said. “We’re probably not going to get anything in the next year, but these things don’t have to evolve overnight — they can take a few years and be just as punitive.”