Ballot decision carries risks for apartment renters. For the third time in seven years, California voters will decide if cities and counties can impose rent control on all apartments and single-family homes. If approved, Proposition 33 would dissolve the Costa-Hawkins Rental Housing Act and potentially impact more than 600,000 units statewide — or 20 percent of California’s rental stock — that are currently exempt from any form of rent control. While the proposition is likely motivated by California’s relatively high average effective rent, which exceeded the national mark by roughly $900 per month in mid-2024, recent growth in California has been muted. Across the state’s eight major markets, the average rent rose just 2.7 percent since June 2022. The U.S. mean increased 5.1 percent in that time. Approximately 20 cities in the Bay Area or Los Angeles County have some form of in-place rent control, a factor that may be contributing to this moderate two-year gain. Further rent regulations, while managing rate increases in the near term, could also create other unintended consequences that harm renters. Chief among these could be the impact to development, which would only serve to underscore the shortage of housing in the state.
Development could decline. High interest rates, a challenging environment for construction financing and the rising costs of labor and materials are making it more difficult for builders to underwrite ground-up developments across California. The potential enactment of statewide rent control on all multifamily units represents another hurdle that could adversely impact the long-term supply of apartments, as rent control would alter developers’ projected returns on newly built properties. The state is already struggling to keep up with building activity in other markets. The combined number of apartments added from 2019-2024 across California’s eight major markets notably trailed other U.S. regions such as Texas, where 185,000 more rentals were delivered.
Passage may prevent recovery in sales activity. Fixed rental increases across cities and counties plus the potential utilization of vacancy control would reduce the expected rental income of a dwelling. This could, in turn, make some of these assets less appealing to prospective buyers, translating to a decline in deal flow and average pricing. These dynamics are already at play without Proposition 33. Across the state’s eight major markets, collective multifamily deal flow was down by nearly 30 percent over the 12-month period ending in March 2024. During this same interval, the average price paid for a multifamily property dropped by nearly 6 percent per unit.
Proposition 33 Specifics
• Proposition 33 is designed to repeal the Costa-Hawkins Rent Housing Act that has been in place since 1995.
• Repealing Costa-Hawkins would allow cities and counties to limit rent increases on any housing and limit the rent for a first-time tenant. Any local laws currently inoperative under Costa-Hawkins would take effect upon its repeal.
• The proposition would enable cities to use vacancy control, which prohibits rental housing owners from adjusting rent to market rates after a tenant moves out. Existing Statewide Laws
• Costa-Hawkins Rental Housing Act prohibits rent control on single-family homes and rentals completed after Feb. 1, 1995. The act also prohibits rent control laws that mandate what a landlord can charge a tenant when they first move in.
• Signed into law in October 2019, AB 1482 caps annual rent increases at the lesser of either 5 percent plus inflation or 10 percent. Change is based on the lowest gross rental rate charged during the preceding 12-month period. The bill exempts properties built within the past 15 years and is designed to sunset after 10 years. It also prohibits owners from raising the gross rental rate for a unit more than twice within a 12-month period, after the tenant has lived in the unit for more than a year.
Rent Control Poses Unintended Outcomes
More deferred maintenance could emerge. The rising cost to operate apartments in California represents another factor that is making construction underwriting and property management more difficult. For existing owners, heightened operating costs and recent rent growth moderation may already be affecting the amount of capital they commit to their properties. Should broad rent control allowances pass, the potential for deferred maintenance likely exists across a larger swath of properties, specifically if expense increases surpass rent growth. Over time, this could impair the quality of the housing stock, adversely impacting renters. As of June 2024, the expenses associated with California apartment ownership were up 6 percent year over year, partially driven by a 30 percent spike in the cost of insurance per unit. At the same time, the state’s average effective rent rose just 0.1 percent. This disparity and expectations for further operating cost increases are likely to influence development proposals, property valuations and investors’ acquisition criteria even if Proposition 33 fails.
Case study shines a light on conditions in rent-controlled area. Residents in the cities of Mountain View and East Palo Alto each passed some form of rent control in late 2016. Their limitations on rent increases appear to be impacting the larger area’s development. From 2017 through June 2024, builders completed an average of 118 units per quarter, with just 73 rentals added over the past year ending in June. This corresponds with moderate rent growth — an average of just $11 per quarter. The submarket’s pipeline was also scant as of August, with a lack of projects proposed across Mountain View and East Palo Alto.
Measures in other states illustrate rent control’s impact. In 2019, Oregon passed measures that limited annual rent increases to 7 percent plus inflation. Since being enacted, apartment development in Portland has shifted to the Vancouver submarket in Washington state. Elsewhere, in St. Paul, Minnesota, housing permit activity declined and concurrently rose in neighboring Minneapolis following voters’ approval of rent control in 2021. In response, amendments to St. Paul’s ordinance have been made, with more changes potentially upcoming. This August, the mayor requested the city council lift rent limits for properties built after 2004. In Oregon, the rent increase cap for 2024 has been adjusted to 10 percent as the 7 percent plus inflation threshold would have set the maximum allowable rent increase at more than 12 percent.
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