The Great Costa Hawkins Debate: How the Los Angeles Multifamily Market Hangs in the Balance
For renters across the Los Angeles multifamily market, 2018 has been both an interesting and challenging year, with fears of wildfire damages to their homes as well as the continuing debate surrounding Proposition 10, the statewide rent control law that, if passed, will repeal the Costa-Hawkins Rental Housing Act (Costa Hawkins) and give municipalities more power to enact rent control laws that supporters say will promote affordable housing. On one hand, Proposition 10 would provide reprieve for citizens struggling to pay the rent. On the other hand, repealing the act could negatively affect the rental and housing market. November will be a deciding month for the City of Angels, as the average rent rate climbs beyond affordability for the average citizen.
Los Angeles’ strenuous rent control history started in 1979 with the Rent Stabilization Ordinance (RSO), which restricts rent control on any unit constructed before 1978. Under the RSO, landlords of multifamily properties built prior to 1978 can set rental rates and change them at any time as long as tenants are notified well in advance, and the rate changes are capped between 3.0% to 8.0%. In 1995, the statewide Costa Hawkins act was enacted, which limits municipal rent control and gives landlords the right to raise rents on a unit to the market level once a tenant moves out. Up till now, Costa Hawkins has kept cities from enabling rent control and vacancy control on units created after its enactment and given rent control exemptions to single-family homes and condos. If an owner has an apartment in a “vacancy control” city, the municipal laws would prevent the owner from increasing rents to new tenants or at least severely limit the increase. However, a new state ballot initiative has gathered enough signatures (365,880 being the required amount) to enact a repeal measure, leaving the vote to the public on whether or not Costa Hawkins will continue. Voters will cast their ballots on November 6 to vote for or against Proposition 10 — the move to repeal Costa Hawkins.
Arguments for Repealing Costa Hawkins
There are many reasons Los Angelenos would want to see this act remain in place:
- The relief it would provide to low-income renters who would likely not be able to afford housing without some kind of rental control system in place.
- Making housing more affordable to low-income renters may lessen the likelihood of people becoming homeless.
- The controlled rent levels may make Los Angeles a more attractive place to live.
- Proponents of the repeal argue that new construction alone will not be enough to make the city more affordable.
Arguments against Repealing Costa Hawkins
One of the most glaring dilemmas created by rent control is the fact that it may unequally redistribute rental increase rates, leaving skeptics to wonder if it is a viable tactic to promote rental equality. According to a San Francisco-based study ( The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco by Rebecca Diamond, Tim McQuade and Franklin Qian), landlords with assets covered by rent control have reduced their rental housing supply by 15.0% by converting to condo units, causing a citywide rent increase of 7.0% and welfare losses to low-income renters of around $5.0 billion. Additional units may be taken off of the market if they succumb to damage from the California wildfires, which have already destroyed about 500 structures, many of which were homes. Critics of rent control have cited a few issues with imposing municipal ordinances on the rental housing market:
- The fact that over time, rent control could possibly reduce the supply of housing, as new units would not be being built.
- These ordinances may also take out a landlord’s incentive to improve existing housing supply or maintain older units at an above-acceptable level.
- Owners may convert rental units to condos or apartments for sale in order to receive a better return on investment.
- High-income renters may have to bear the cost of lost landlord revenue stemming from curtailing the costs of low-income renters.
The latest reported average rent in Los Angeles from Zillow’s listings is $2,979 as of September 2018. Average rent rates across Los Angeles have remained steady, with the most prominent increase beginning in 2014 (refer to Exhibit 1). The average rent rate increase since November 2010 is about 31.2%. The change from August 2017 to August 2018 is about 2.0%, and the average year-over-year (YOY) rent increase is about 0.2%. Average house values have also been steadily increasing since the recession (refer to Exhibit 2) and currently stand at $679,200, according to Zillow’s Home Value Index. These values are expected to increase by 5.8% YOY by the Index’s estimates. According to the CBRE’s Los Angeles Multifamily MarketView Figures Q2 2018 report, there were 32,611 units under construction at the beginning of 2018, which is 12.2% higher than the previous year. Furthermore, the units under construction would increase the market supply by 3.3%. The report predicts that despite the higher costs of construction occurring nationwide, development is expected to be relatively high throughout 2019 and 2020. The supply completion level is at a record high, though rent stabilization may challenge these high levels of construction moving forward, as investors and landlords may view apartments as less profitable assets.
There are currently five DBRS-rated Los Angeles multifamily properties with a 2017 to 2018 vintage origination year (refer to Exhibit 3). The low vacancy rates in Los Angeles are consistent with the data reported by DBRS’s Viewpoint, which shows an average occupancy of 94.6%. These properties also have a an average appraisal value of $29.7 million and generate an average $1.2 million net cash flow.
There are viable concerns to both repealing counter-rent control measures and to letting property owners set rents at potentially unaffordable heights. According to Curbed Los Angeles, not much is expected to happen over the short term if Costa Hawkins is repealed, as the act would only give individual cities more flexibility when setting rent control policies. This leaves the decision up to the individual municipalities as to whether or not they will allow landlords to raise rents to market levels or whether they will take more of a free market approach. If the act is repealed, the market could see some downward pressure on value and ultimately lower rents, resulting in reduced cash flow. From a CMBS angle, this could potentially put existing loans underwater. The City of Los Angeles will need to concern itself with finding a solution that unburdens low-income renters while maintaining the health of the market.
A copy of this research is available on the DBRS website and the Viewpoint blog.
Follow Stephanie Hughes on Twitter @StephHughes95.
