Western Real Estate Business

SEP 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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58 • September 2018 • Western Real Estate Business www.REBusinessOnline.com The upcoming California vote in November regarding the ballot mea- sure to repeal the Costa-Hawkins Rental Housing Act, also known as Proposition 10, is quickly approach- ing. If Prop. 10 passes, it would allow individual cities to institute vacancy control, as well as rent control on all apartment buildings regardless of the year they were built, as well as on single-family residences and condo- miniums. Much of the Los Angeles area has been a seller's market for the past five- plus years, but concerns from multi- family owners and developers on the proposed Costa-Hawkins repeal show signs the market is shifting. Buyers are becoming increasingly more se- lective with their purchase criteria. This has led some to avoid investing altogether in certain cities within the metro region where they suspect rent control may be significantly expanded if Costa-Hawkins is repealed. Buyer offer activity is also down from this time last year. Where appro- priately priced listings would receive 10 to 15 offers in 2017, similar listings are now topping out at five to seven offers. Investors are increasingly fo- cused on areas where they can find a higher immediate yield, rather than buying in prime areas for lower initial returns. Sellers are also showing some be- havior changes due to the Costa- Hawkins issue. Many owners who previously thought they would wait one to two years to sell are moving up their timelines to list now or con- sidering this action within the im- mediate future. Some sellers are also getting more realistic about pricing and return expectations as they ac- knowledge that, along with rising interest rates, the Costa-Hawkins repeal risk is a legitimate deterrent for buyers and a strong impediment to pushing pricing during the listing and sale process. Despite the concerns, the Los An- geles metro apartment sales mar- ket had yet to fully feel the effects of these concerns through the second quarter of 2018. According to CoStar data, apartment sales prices remained virtually flat from the first quarter of 2018 to the second quarter of 2018. Year-over-year prices, however, were up almost 15 percent from the second quarter of 2017 to the second quarter of 2018. Sales volume was also virtual- ly flat from the second quarter of 2017 to the second quarter of 2018, which is another indication that buyers have remained active in the market. A significant increase of apartment buildings for sale in the Los Angeles area supports the perception that sell- ers are nervous about the November Costa-Hawkins vote. According to a search of MLS records, sellers in Los Angeles County submitted 592 new multifamily listings with eight or more units from Jan. 1 through Aug. 1, 2017. For the same period this year, 786 new listings were submitted — a 32 percent increase over 2017. While market data and investor sentiment provides a good snapshot of the current Los Angeles multifam- ily investment mar- ket, the question remains: What will happen if the Costa Hawkins Rental Housing Act is re- pealed in Novem- ber? For many mu- nicipalities, it will take some time to pass and implement new rent control ordinances. While cities are working on the new laws, buyers are most likely going to seek discounted prices to protect themselves from the risk of an uncertain legislative future. Sell- ers will not likely immediately low- er their pricing expectations, which could create a period of gridlock. If some cities do ultimately pass vacan- cy control and implement rent con- trol on newer properties, values will certainly decrease significantly. Sell- ers will have to come to grips with this new reality. n A WEIGHTY PROPOSITION Proposition 10, also known as the Local Rent Control Initiative, could allow local governments to adopt rent control ordinances in California. Below, two WREB experts weigh in on what this might mean for multifamily investors, owners and developers. When they cast their ballots on Proposition 10 in November, Cali- fornia voters could open the door to a dramatic expansion of rent control across the state. A high-profile battle over the initiative is already under- way as multifamily owners and de- velopers fight to defeat the measure sponsored by tenant advocates. Cam- paigns surrounding Prop. 10 have raised a substantial amount to date; with opponents raising more than $20 million and supporters raising $2.5 million as of mid-August. The current state law governing lo- cal rent control, known as the Costa- Hawkins Act, allows local govern- ments to adopt only a narrow range of rent control measures. The three pri- mary restrictions that cities and coun- ties must follow are: 1. Local rent control laws can restrict only apartments that were constructed before February 1995. 2. Local ordinances must permit "vacancy decontrol," which allows landlords to raise rents to market levels once a tenant moves out and a new tenant moves in. 3. Rents on single-family homes and condominiums cannot be restricted. Under these restrictions, only a few local rent control ordinances have been adopted since Costa-Hawkins was passed in 1995. However, inter- est in new rent control ordinances has picked up in the past few years as rents have risen rapidly through- out California. In 2016, Richmond and Mountain View became the first cities in more than three decades to pass new rent control ordinances. Prop. 10 would repeal the Costa- Hawkins Act and give cities and counties explicit authority to adopt lo- cal rent control laws. While Prop. 10 would not impose rent control itself, it would empower local governments to do so. The only restriction in the initiative is that local rent control laws cannot abridge a landlord's right to a fair rate of return on its property, a restriction that essentially restates ex- isting legal protections for owners and landlords. What Happens If the Initiative Passes? If Prop. 10 passes, a wide variety of rent control ordinances could be pro- posed at the local level. For example, local governments would be expected to limit rent increases for units con- structed after 1995. Some might re- strict rent increases for single-family homes, condominiums and accessory dwelling units in addition to apart- ments, while others are likely to leave rent restrictions in place when a ten- ant moves out rather than allowing rents to increase to the current market rate for a new tenant. Rent Rollbacks. Many communi- ties facing an overall housing afford- ability crisis will not be satisfied with setting rents at current levels; instead, they will seek to roll back rents to past levels. Legal fights are to be expect- ed over the question of whether this would give owners a fair rate of re- turn on their investments, as required in Prop. 10. Conversion to Ownership Units. The debate continues as to whether rent control incentivizes owners to convert rental housing stock to own- ership units, where sales prices are not restricted. To address this situa- tion, proposed local ordinances might require owners to provide current ten- ants with notices of conversion, rights to purchase units at discounted prices and/or relocation payments upon conversion of rental housing to for- sale units. Impacts on New Construction. One of the most powerful arguments against rent control is that it discourages new residential construc- tion if rental income cannot keep up with the ever-increasing cost of building in California. Housing advocates may challenge local ordi- nances that make it difficult to expand the community's housing supply to state-required levels. Some local gov- ernments might consider exempting or providing a grace period for new construction from their rent control ordinances. Pick Your Battle. Housing financ- ers, developers, owners and landlords have a choice. They can either fight Prop. 10 on the November ballot, or they can fight the drafting, compli- ance and enforcement of a patchwork of potentially hundreds of different rent control ordinances passed in cit- ies and counties across California if this proposition passes. Goetz Kaplan LOCAL RENT CONTROL IN CALIFORNIA COULD DRAMATICALLY EXPAND UNDER PROP. 10 ON NOVEMBER BALLOT By Jon E. Goetz, Principal, Meyers Nave in Los Angeles AS POTENTIAL RENT CONTROL LOOMS, LA APARTMENT MARKET PREPARES FOR CHANGE By Josh Kaplan, Senior Vice President, Transwestern in Los Angeles

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