Rent control is a policy tool designed to protect tenants from escalating housing costs by capping the amount landlords can increase rent. While it benefits renters by promoting housing stability, it poses significant challenges for property owners and the rental housing market. Major cities such as Santa Monica, Los Angeles, San Francisco, New York, and Washington D.C. have long experimented with rent control policies, with varying results. As California voters prepare to revisit this debate with Proposition 33, it is essential to examine the broader impacts of rent control on property owners and the availability of rental housing.

Impact on Property Owners

Rent control fundamentally alters the economics of rental properties. For landlords and property owners, the primary concerns include:

1. Reduced Profitability: Rent control caps the amount by which rents can increase, often not accounting for inflation, rising maintenance costs, or property improvements. Property owners, especially those operating smaller units, may struggle to maintain profitability. As a result, they may defer maintenance, leading to deteriorating property conditions. In San Francisco and Santa Monica, some landlords have reported difficulty in maintaining their properties due to limited rent growth, impacting the overall quality of the housing stock.

2. Incentive to Sell or Convert: In cities like New York and Los Angeles, some property owners, faced with declining profits, choose to sell their properties or convert them into condominiums. The rental market shrinks as units are taken off the market, which paradoxically worsens the housing shortage. In Washington D.C., rent-controlled buildings have increasingly been converted into co-ops or market-rate condominiums, as property owners try to capitalize on rising real estate values in ways that are not restricted by rent caps.

3. Legal and Bureaucratic Hurdles: Rent control policies often come with a complex set of regulations that property owners must navigate. In Los Angeles, for example, landlords must adhere to specific rules when raising rents, evicting tenants, or renovating units. These regulations can add additional costs, especially for smaller landlords who may lack the resources to manage the administrative burden.

4. Disincentive to Improve Properties: In rent-controlled areas, landlords may have little financial incentive to invest in property upgrades because they are unable to charge higher rents to offset these costs. Over time, this can lead to a decline in the overall quality of housing in rent-controlled cities like San Francisco, where aging properties remain locked in rent-controlled agreements that fail to account for significant capital improvements.

Impact on Availability of Rental Housing

 The availability of rental housing is one of the most debated aspects of rent control, with several potential effects:

1. Supply Constraints: Rent control can reduce the availability of new rental units. Developers may be reluctant to invest in rental housing in cities with strict rent control policies because of concerns about limited returns on investment. In San Francisco and Santa Monica, where stringent rent control has been in place for decades, the construction of new rental housing has slowed considerably. Instead, developers often pivot toward building luxury condos or units aimed at higher-income tenants not subject to rent control.

2. Reduced Mobility: Rent control creates a situation where long-term tenants, enjoying below-market rates, are reluctant to move, even if they would otherwise choose to do so. This locks units out of the market, reducing mobility and making it more difficult for new renters to find housing. In New York, for example, rent-controlled units can remain occupied for generations, leaving newer residents facing a scarcity of available apartments.

3. Distorted Market Dynamics: The mismatch between supply and demand in rent-controlled areas can lead to informal market distortions, such as illegal subletting. Tenants in rent-controlled units may rent out rooms or sublet entire apartments at market rates, bypassing rent control regulations. In Washington D.C., anecdotal evidence suggests that subletting at above-regulation rates is a common practice, which further exacerbates housing inequities.

4. Rental Market Polarization: Rent control often creates a divide between two segments of the rental market: rent-controlled units and market-rate units. Rent-controlled tenants enjoy significantly lower rents, while market-rate tenants face inflated prices as landlords seek to compensate for their controlled units. This phenomenon has been observed in Los Angeles and San Francisco, where market rents skyrocket, particularly in neighborhoods where rent-controlled units are more concentrated.

Proposition 33 and the Future of Rent Control in California

Proposition 33, a ballot initiative in California, seeks to expand rent control by repealing the Costa-Hawkins Rental Housing Act, which currently limits rent control to buildings constructed before 1995. If passed, the proposition would allow cities like Los Angeles, Santa Monica, and San Francisco to implement rent control on a wider range of buildings, including newer developments.

Supporters argue that expanding rent control will help alleviate the housing affordability crisis by protecting tenants from skyrocketing rents. However, opponents caution that Proposition 33 could exacerbate the state’s housing shortage by discouraging new development. Developers may opt to invest in other states or focus on non-rental properties, further constricting the rental market. Landlords, facing the prospect of reduced returns, may also withdraw existing units from the rental market through conversions to ownership models like condominiums.

Balancing Tenant Protections and Housing Supply

Rent control remains a deeply polarizing issue, particularly in high-demand cities such as Los Angeles, San Francisco, and New York. On one hand, it provides essential protections for tenants against displacement and unaffordable rent increases. On the other hand, it poses significant economic challenges for property owners and contributes to the overall scarcity of rental housing.

As California considers Proposition 33, the state faces a difficult balancing act: How to ensure that tenants are protected while also encouraging the construction of new housing to meet demand. The challenge lies in creating policies that both promote housing stability for renters and foster a healthy, dynamic housing market.

Ultimately, any long-term solution will likely require a combination of tenant protections, incentives for developers, and creative housing policies that increase the overall supply of affordable housing.

Financing Properties in Rent Controlled Markets

When considering the purchase or refinancing of a residential unit in a rent-controlled apartment complex, a property owner is likely to have difficulty. Lenders are keenly aware of the economic limitations imposed by rent control, and the long-term effects of such legislation do not account for any controls on inflation and other operating costs of buildings.

As these costs increase, operating income reduces or is eliminated, making the proposition a cash drain for the property owner. As such, rent control introduces a new level of risk to multifamily financing in these areas.

We have experienced many lenders pulling funding from California residential properties until the results of the upcoming election are known. If Prop 33 passes, multifamily property owners may find that their funding options diminish, become more costly, or potentially cease to exist.

The danger comes from political advertisements that do not adequately explain the risks to renters that are posed by rent control, as discussed above. We feel that it is much better to allow market forces to determine rents and for governments to focus more on quality of housing and measures that will increase the number of units available on the market. Rent control accomplishes the exact opposite!