Rent Control: A Quick Fix Or Long-Term Solution?
With rents heading upward in many cities in the U.S., municipalities have turned to rent control to contain skyrocketing rents. In California, where affordability is on the minds of residents, rent control is again up for debate as state lawmakers consider removing a huge restriction on current rent control laws.
“California has had affordability problems all the way back in my lifetime, but I have never seen it this bad, particularly in Southern California,” said Joan Ling, a lecturer in urban planning at UCLA.
Rent control is not unique to California. But in the Golden State, it has become a highly contentious issue within the last year — especially as lawmakers push for ways to increase affordability.
Affordability has deteriorated significantly within the last 10 years and has been most acute in Los Angeles, according to Ling.
Rents have increased in Los Angeles, but income has not gone up in a meaningful way in the last 40 years. San Francisco is the nation's most expensive city to rent, and there are so many well-paid people looking for housing, which has contributed to the rental increases, Ling said.
In 2014 and 2015, Los Angeles’ rent stayed close to the national average, but it is now several percentage points above the national average, according to Multi-Housing News. Renters are paying an average of $1,775/month in Los Angeles.
Bay Area rents are still much higher, and many residents are starting to move to Southern California for more affordable housing options, according to the San Francisco Chronicle.
In the latest move to address affordability, California state legislators are considering a repeal of the Costa Hawkins Law. This law, enacted in 1995, restricts the application of local rent control laws to stock built before 1995, exempts single-family homes from rent control, and allows landlords to raise the rent to market value once a tenant vacates an apartment.
On a local level, rent control laws were on six Bay Area city ballots during the last election, with Richmond and Mountain View voters approving new measures and Oakland strengthening its existing laws. Concord is considering a rent mediation program for tenants to challenge rental increases over 10%.
Not everyone has been happy with new rent control measures. The California Apartment Association is fighting rent control in both Mountain View and Richmond. Landlords are pouring thousands into fighting a June referendum vote on Santa Rosa’s rent control ordinance.
The Limitations Of Rent Control
In particular, removing the restrictions of the Costa Hawkins law could have dramatic implications for developers in California.
“It could be devastating to the creation of new rental housing,” Emerald Fund principal Marc Babsin said. “Apartments won’t make financial sense, and it will just stop the production of new rental housing.”
He said equity investors need a return and look at future rent growth. If you have a rent control limitation on the consumer price index, there is no upside to a project. In a place like San Francisco where people want to live, if there is no new housing, existing housing costs will continue to rise, Babsin said.
Rent control is great for the tenant who gets it, but it drives up the cost for everyone else, he said.
Given the delivery of thousands of new units of housing this year and next, rents have started to go down in San Francisco. Yardi Matrix calculated a 3.6% decline in February 2017 compared to February 2016. Zumper data revealed one-bedroom average rent declined 9% year-over-year. San Francisco still boasts the highest rent in the state at about $3,270, more than double the state’s average of $1,617.
“We need to produce more housing to help the affordability crisis,” Babsin said. “Rent control is a short-term Band-Aid.”
He said Seattle has had similar job growth as San Francisco, but built more housing per capita than San Francisco. Rents in Seattle have not skyrocketed like in San Francisco.
Rent control is a short-term and intermediate solution that calms housing down so tenants do not face high rental increases, but it does not create more housing, according to Ling. The downside with vacancy decontrol, which applies to California cities, is if a tenant vacates a rent-controlled unit, the landlord can raise the rent to market rate.
Rent control often creates incentives for landlords to pressure long-term tenants to leave, according to Ling. Also, if rents are set far below market value, landlords could sell the building to a condo converter, who can then legally force residents out under the Ellis Act.
How Rent Control Helps Residents
To San Francisco Tenants Union Steering Committee spokesperson J. Scott Weaver, it is no surprise rent control is back on lawmakers’ minds. He said there is a direct correlation to increasing rent and the tenacity of municipalities to enact rent control.
San Francisco’s rental ordinance was enacted over 30 years ago and now covers 170,000 units. It sets an allowable rate increase every year from March to February. The March 2017 to February 2018 increase is 2.2%.
“For me, there’s a human cost, a loss of community [without rent control],” Weaver said. “People who move out of this city never do better.”
People who leave San Francisco never replicate the quality of life and their expense structure is worse. He said people who move into other cities in the Bay Area might have cheaper rent, but their expense structure changes with the addition of commuting time and expenses. People also lose social services, connections with churches and other community centers, and social safety nets established in their previous communities.
“Rent control is a way to allow people to live in their communities,” he said.
Part of the problem with affordability is the addition of office space without the housing. San Francisco recently approved an additional 2M SF of office at Bay View and Hunters Point and a plan in Central SoMa could add another 2.5M SF of office in addition to what is under development in downtown San Francisco.
People who work here will want to live here, but there has not been much done to accommodate increased housing need, Weaver said. The city also assumed that for every 300 SF of office space there would be one worker, but tech workers use half that space — causing an underestimation in how many people would work in the city and how much housing would be needed, he said.
What Can Be Done?
To maintain affordable housing, cities need to build up density, reduce the need for parking and set aside a number of units as affordable housing, Ling said.
One of the problems in Los Angeles is it does not have the zoning capacity for more units during a time when more density is needed. The city is investing billions to build up transportation, but is not pairing that with increased density. Ling said neighborhoods seem to want the transit, but not the density.
Parking is extremely expensive and reducing the amount of parking means developers spend less on a site and can add more units. If cities build out transit along with density, they can require parking around transit stations instead. For both of these concepts to work, there needs to be some kind of inclusionary housing requirement for market-rate housing to make sure affordable housing also is built.
In San Francisco, affordability set-aside has been a constant ire of developers, but Ling said it is an integral part of creating affordable housing.
“Developers say they can’t build anything if there are any constraints, and that’s their negotiating position,” Ling said. “At some point it is going to slow down development, but I don’t believe that requiring a modest percentage being affordable is going to kill all development because there is 75% of the project that can generate and charge market rates.”
More housing also needs to be created for extremely low-income households that cannot afford affordable housing, including special housing for homeless people, Ling said.