Government Controls Over Property Rental Rates

On November 6, 2018 voters went to the polls, and Proposition 10 was defeated which keeps the current laws effecting residential rental rates to remain somewhat constant.

The City of Los Angeles Rent Stabilization Ordinance protects tenants from excessive rent increases on multi-family apartments built before1979. However, it lets landlords increase the rents every year to a reasonable amount.  The rent increases are determined on the consumer price index, according to the Los Angeles City website.  The rent increase caps on rent stabilized apartments in Los Angeles City is currently 3% this year and has been 3% for about the last 10 years, according to the website.

The City of Los Angeles cannot cap rental rates when a tenant moves out of a building built before 1979.  The Costa-Hawkins Act of 1995 made it illegal for cities to enforce caps on multi-family rental rates when a new tenant moves in.  

The owner can raise the rent to as high as the market can bear after the tenant vacates the apartment.  As a result, Los Angeles City has the fourth highest median apartment rental rate in the country behind  number one San Francisco and San Jose number three, according to Zumper.com National Rent Report November 2018.   The Median price for a one bedroom in the City of Los Angeles is $2,430.  One bedroom rent in Los Angeles City is up 15.7% since November last year the Zumper report said.  

Proposition 10 would have repealed the Costa-Hawkins Act of 1995 and given Los Angeles and all California cities back the power to cap rental rates on all multi-family and single-family rental units for new tenants moving in; however, voters rejected it.

Rent control works for tenants who want to remain in their apartments or homes with minimal rental rate increases. This law is not favorable for landlords who want to bring their rental properties up to current market values.

The only time that the rents can be brought up to market value is when the tenant vacates the rental unit. The current law protects the tenants and allows the landlord to only look forward to a possible vacancy when rents may be increased.  

As a result, existing multi-family vacancy rates are extremely low in Los Angeles.  Renters don’t want to leave their current apartment, because they may have to pay more rent if they move into a different apartment in Los Angeles.  In addition, it makes it extremely difficult for a new renter to find a decent apartment for the median price in Los Angeles.

Proposition 10 would have placed another layer of government controls by restricting rents when a vacancy occurred to a fair market value. The mechanics of the way the City of Los Angeles government and other California cities would determine a fair market value when a rental unit was vacated was uncertain if Prop 10 had passed.

In Contrast, there are no restrictions on rental rates in the commercial real estate market and the market determines the rates. For many years, commercial rental rates were stagnant and even decreased during the great recession. These mechanics of market determining rental rates has worked out very well without government control for commercial real estate.

Certain sectors of commercial real estate are now showing a similarity of a shortage of available space. The industrial real estate market in many areas of Los Angeles County is down to a 1% vacancy rate. Therefore, there is very little space available for tenants to relocate. Further, rental rates in many areas of Los Angeles County have increased by as much as 12% in the last year.

There is virtually no new space under construction to resolve the vacancy, so the market will adjust when the economy cools.  Many commercial companies simply cannot pick up and move to another state; in contrast, a single residential tenant may find a job in another state where residential rents are lower and there are plenty of vacancies.

The essence of this blog is to point out that there is no need for excessive governmental controls in the commercial real estate market; however, there should be controls for residential units. It is my concern that governmental controls may be placed upon commercial real estate in the future.

“Lee Segal’s knowledge in the commercial real estate industry is unparalleled. I have consulted with him over the years and he’s helped me on various cases. Lee always makes himself available and accessible to his clients.”  
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