September 10, 2019
By Colliers International’s Bay Area Multifamily Team
Commercial apartment owners in the state of California are facing adversity on multiple fronts – both from an increasingly toxic political dynamic, and idle all-in borrowing rates from lenders who are requiring a minimum yield despite the recent rally (“flight to safety”) in treasuries. Cumbersome legislature (Assembly Bill 1482 and the “Rental Affordability Act”) and uncooperative debt fundamentals are causing some owners to question their California investment strategy.
State laws have forced their way into primary consideration for most multifamily property owners in California. As of now, rent control measure Assembly Bill 1482 is poised to clear the state Assembly and Senate. The measure would, for the next decade, place a limit on the maximum rent increase on all commercial apartment units in California of 5% plus CPI (which historically has averaged approximately 2.5% in California) or, in cases where laws are more stringent, defer to local regulation. It would apply to all properties that are more than 15 years old, and property owners with more than 10 for rent, single-family homes. In July, the bill passed 6-1 in the first state Senate committee, where it was amended to include “just cause” eviction restrictions that would require property owners to provide just-cause in writing in order to evict a tenant, assuming they had occupied a unit for 12 months or more. Within the last week the bill got a major boost with an endorsement from Governor Gavin Newsom, who historically had been neutral related to matters of rent control upon his election one year ago.
Over the past three months, the 10-year treasury yield has fallen by nearly half a percent. Typically, this would create a proportionately lower interest rate for new commercial borrowers. Unfortunately, some lending institutions have not been behaving as expected. The GSE’s (Government-Sponsored Enterprises, Fannie Mae and Freddie Mac) are predictably expected to exceed their lending goals for the year, and are increasing spreads on their loans as volume continues to outpace their demand. As a result, all-in interest rates have remained mostly unchanged pricing rather than tracking the treasury yield downward. Multifamily landlords have not been realizing the usual upside of a stock market sell off and flight to safety in treasuries.
Housing is a Human Right (an advocacy group that sponsored the Proposition 10 rent control measure which failed by a vote of 60% to 40% last year), is still aiming to curtail Costa Hawkins with new legislation: “Rental Affordability Act.” The act would give power to cities and counties to implement vacancy control – which would mean that property owners wouldn’t be able to charge a new tenant a fair market rent, regardless of whether the previous tenant moved out voluntarily or not. As it’s currently written, when a unit becomes vacant, property owners would be restricted to increasing rents by no more than a total of 15% over the subsequent three years and would have to abide by any additional local laws. The authors of the measure created an exemption for people who own two or fewer homes, a stipulation that’s expected to significantly boost votes and get the measure passed. Housing is a Human Right is collecting signatures to get the measure on the November 2020 ballot.
As rent control will likely be ubiquitous very soon in the state of California, some owners are making entries into new markets. Investment fundamentals have led some to sell out of California and buy into other U.S. locales (e.g. Phoenix, Salt Lake City, Denver, Reno and Texas). Some investors have opted to double down on urban and core suburban, rent-controlled locations such as the core Bay Area (San Francisco and Oakland), banking on strong locations to create durable demand. On a broader scale, multifamily indicators such as new construction, rent growth and job growth in California continue to thrive. Whether or not legislators will remedy the dearth of housing in order to meet the huge demand remains to be seen.
For comments, questions or concerns, please contact Dennis Kaiser