“This makes the problem worse:” Industry pros say statewide rent control bill won’t help housing crisis

Landlords and developers are split on the impact California's landmark legislation will have

TRD LOS ANGELES /
September 12, 2019 05:00 PM
From top left, clockwise: David Chiu, Henry Manoucheri, Eric Sussman, and CAA CEO Tom Bannon (Credit: Getty Images)
From top left, clockwise: David Chiu, Henry Manoucheri, Eric Sussman, and CAA CEO Tom Bannon (Credit: Getty Images)

When New York passed its historic rent reform law in June, Los Angeles-based landlords shuddered at the thought that California could be next. Some claimed they would shift their investments into projects in other states, while others began raising rents as a precaution.

Three months later, their fear became reality.

On Wednesday, California lawmakers voted to expand rent control in the state for the first time in 25 years. The landmark bill — which has a 10-year lifespan — will cap yearly rent increases at 5 percent plus inflation and provide tenants with expanded protections against evictions. Gov. Gavin Newsom is expected to sign the bill into law.

But local real estate pros were split on whether California’s rent reform measure will have as big an impact as New York’s legislation has had on the industry.

Andrew Starrels, a Holland & Knight partner who specializes in land use, said investors are now “balancing against the general feelings that recessionary times are coming. This is another drag in an investor’s model so I’m sure there will be some deals that won’t get made.”

But he doesn’t expect the bill will “be fatal to either side,” referring to tenant advocates and landlords. “We got tremendous demand for investment, very high values and I don’t know that this is going to send everybody elsewhere.”

Doug Bigby, president of the National Multifamily Housing Council took a stronger position, arguing the measure will “discourage investment, shrink the availability of affordable housing that already exists and squeeze even more people struggling in the housing market. This makes the problem worse,” he said in a statement.

Assembly Bill 1482, as it is now called, represents one of the biggest steps in addressing the affordable housing crisis. For affordable housing advocates, the law will be a victory.

“Tenant protections like these are an important measure to address the upstream causes of people losing their homes,” said Leonora Camner, managing director of Abundant Housing L.A. “I think we’ll continue to see more protections for renters.”

Value to investors
But some developers and property owners interviewed for this story said all was not lost, and that the 5 percent rent cap will still provide value to investors.

The bill still allows for vacancy decontrol, which New York’s rent regulation eliminated, meaning California apartment owners can still raise the rent to market rate when a tenant vacates a unit.

Henry Manoucheri, founder of Century City-based multifamily builder Universe Holdings Development, said he’s “disappointed” the bill was approved, but not the least bit “shocked.” His firm had been preparing for the past two years. He raised rents on properties that weren’t under rent control and bought more buildings that were, for their predictability. Roughly half of the firm’s 3,000 units across Southern California are rent-controlled.

Manoucheri expects the bill will cause landlords to spike rents on their vacant units, something he’s already seen in neighborhoods like Inglewood, which has a significant number of rent controlled buildings. He said landlords may also choose to cut back on renovations or value-add investments that require pouring money into repairs and rehab.

Eric Sussman, a real estate investor and professor at the University of California Los Angeles, said AB 1482 “is not going to work.” While it could lead to fewer evictions in the short term, Sussman said it will also reduce the number of real estate transactions and investment in the state.

Through his firm Clear Capital, Sussman has also been preparing. Clear Capital owns around 3,500 units, though most are outside California. The firm sold many of its assets in the past year.

Another component of the bill is that landlords will be barred from evicting tenants unless they can prove “just cause.” It will apply in cities that don’t have rent control laws, and will likely expand protections in the ones that do, like Los Angeles, West Hollywood and Inglewood.

The new measure comes less than a year after voters statewide rejected Proposition 10. That would have repealed the Costa-Hawkins Rental Housing Act of 1995, opening the door to expanded rent control laws.

AB 1482 covers buildings that are 15 years old or older, but does not include single-family homes. It will also exempt buildings already subject to rent control, which in L.A. is around 624,000 units and 118,000 properties, according to the city Housing & Community Investment Department.

Once the bill becomes law, California will become the third state in the nation to have statewide rent control. Oregon is the other, besides New York.

California Apartment Association, the largest landlord association in the state, had led the battle against the measure. But CAA ultimately withdrew its opposition during final negotiations.

“We now, of course, need to address the largest issue facing the state, which is the production of affordable housing,” spokeswoman Debra Carlton wrote in an e-mailed statement. “While this legislation is a temporary solution, we must get serious about moving forward on production, which is the only way we address our housing crisis.”

Alison Stateman contributed reporting.