The Industry Is Split Over New Rent Control Bill

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While the commercial real estate industry is seldom an advocate for rent control measures, the industry is split over the new state rent control bill. While there has been concern about how it could impact value-add investment and apartment quality for current owners and operators, some are also seeing the laudable aspects of the bill, which is aiming to keep people in their homes amid a severe supply crisis.

“Affordable housing in California is a legitimate cause,” Pat Jackson, CEO of Sabal Capital Partners, tells GlobeSt.com. “A lot of people want to figure out how to solve the affordable housing problem in California. Then, once the Governor got behind it, I expected it to pass, and indeed it did. They did a good job as far as going back out to industry and getting developers sign on. It relieved a lot of concerns that this will stifle new supply coming into the marketplace.”

Jackson, like most in the industry, sees the housing crisis as a supply problem, and therefore any solution shouldn’t reduce supply. “We are already at a near crisis level of supply, and the demand is growing. That is a real problem. The laudable aspects of the bill are to try to keep rents from growing and squeezing out more working Americans from putting so much of their disposable income toward rent or having an option to live,’ says Jackson. “The bill is laudable. I don’t think anyone is going to disagree with ultimately what it is trying to accomplish.

Luckily, developers so far aren’t worried about the rent cap, and don’t see that it will impact the construction pipeline. “Developers have come forward and said that this won’t stifle new development,” says Jackson. “That is fantastic, if that is true, because we need more supply. The demand is there and it is growing.”

From the capital market perspective, Jackson also doesn’t expect a negative impact, because they underwrite to current rents, not future rents. ““It doesn’t change how we will view the market. We don’t look at proforma,” he says. “We are underwriting to current cash flows, so the fact that investors can only increase rents 5% per year really doesn’t impact us. Artificial measures can sometimes have unintended consequences. Those remain to be seen.”

That doesn’t mean that the bill won’t have a downside. For one, Jackson says it could ensure annual rent increases of 5% because investors won’t want to miss the opportunity to increase rents. “I think that owners will raise rents 5% per year, no matter what,” he says. “If you miss a year, you are going to be behind. It may have unintended consequences of having not only a cap of 5% but a certainty of 5% each year.”