On November 6, California voters will cast their ballots for or against Proposition 10, which would repeal the Costa-Hawkins Rental Housing Act. Marcus & Millichap’s National Multi Housing Group First Vice President and National Director John Sebree hosted a webinar on September 6 featuring real estate industry executives to gain their perspectives on the proposition.
Costa-Hawkins was enacted in 1995 and limits the use of rent control. The act states that units built after February 1, 1995, and single-family homes are not subject to rent control, exempted housing must remain exempt, and landlords may increase rental prices to market rate when a tenant moves out.
A screenshot of a September 6 webinar shows real estate experts discussing Proposition 10, which would expand the reach of rent control statewide through the repeal of the 1995 Costa-Hawkins Rental Housing Act. Pictured from left: John Sebree, first vice president and national director of Marcus & Millichap’s National Multi Housing Group; John Eudy, executive vice president and chief investment officer of development at Essex Property Trust Inc.; Jim Lapides, vice president of strategic communications for National Multifamily Housing Council; and Damon Conklin, director of government affairs for The Federation of California Builders Exchanges.
Jim Lapides, vice president of strategic communications for the National Multifamily Housing Council, argues that increasing the reach of rent control – passing Proposition 10 – would not aid in solving the housing crisis but rather exacerbate it. “When milk is expensive, you figure out how to get more cows to make more milk,” he said. “You don’t put a cap on the price.”
Lapides said there are three “pillars” needed to alleviate the state’s housing crisis: construction of housing for people of all social standings; public-private partnerships such as land swaps and other programs to encourage construction; and targeted assistance through federal or local voucher programs for those in the greatest need such as veterans, the homeless and low-income families.
Gubernatorial candidate Gavin Newsom weighed in on Proposition 10 at a housing conference in March. “Getting rid of [Costa-Hawkins] overall may have unintended consequences on housing construction and production that could be profoundly problematic,” he said.
A coalition of teachers, nurses, seniors and renters have created a “Yes on 10” campaign under the slogan, “Because the rent is too damn high!” According to the coalition’s website, giving “free reign” to developers and landlords is making it difficult for working-class communities to stay in their homes. A lack of rent control protections is forcing many into long commutes or to become homeless, the coalition contends.
During the webinar, John Eudy, executive vice president and chief investment officer of development for Essex Property Trust Inc., said the Yes on 10 slogan is a “mirage” that provides no facts to support rent control’s effectiveness. The three panelists and moderator agreed that the solution to housing affordability is not more regulations, such as increased rent control. Rather, they believe housing construction needs to be deregulated to encourage development.
“The solution is building more units. There is not another vehicle,” Sebree said. “We have to get to the point where we can deliver units at a cost far below where we are today.”
Sebree analyzed construction in Los Angeles and San Francisco compared to Denver, Seattle and Dallas-Fort Worth, and found the latter group produced twice as many residential units between 2013 and 2017. He argued that the reason for the slower rate of construction in California are its regulations, which result in high fees on top of construction costs.
Damon Conklin, director of government affairs for the Federation of California Builders Exchanges, explained that impact fees (fees charged by local governments to provide public services to a new development) alone average $23,000 per residential unit in California. In San Francisco, impact fees can reach $200,000 per unit, while Irvine averages $60,000 per unit, he added.
The panelists argued that the ramifications of repealing Costa-Hawkins would affect the state’s economy by forcing the workforce to move out of state and decreasing investment. Sebree recalled how Santa Monica experienced a dramatic decrease in its housing stock before Costa Hawkins was enacted because its rent control policy made it so that properties were not economically viable for the owners, who then demolished them to make way for other uses. The remaining housing stock deteriorated because landlords could not increase rents enough to keep up with increasing operating costs, he added.
Conklin speculated that the continued increase of construction jobs would cease and likely decline if Costa Hawkins were repealed. He reasoned that developers would opt not to build projects that would be subject to rent control due to a diminished return on investment.
“There is an issue that needs to be addressed, and if we don’t, it will only get worse,” Sebree said. “There is a middle-class housing crisis, but Proposition 10 is not the answer – it will make the situation much worse.”
Single-family homeowners would also experience a reduction in their home value if Costa-Hawkins is repealed, Lapides said. Homeowners would be held to the same rent control regulations as multi-family property owners, which would mean slower income growth for those renting their homes or a room, as well as a freeze on single-family home construction, Lapides explained.
At the national level, 35 states have various levels of preemptions against rent control, Lapides noted. The revisiting of rent control as a viable solution to California’s housing crisis is the result of people forgetting why it doesn’t work or not having been around to experience it firsthand, he added.
“We need to get to the root of the problem, not treat a symptom,” Conklin said. “Prop. 10 doesn’t build a single unit. It doesn’t bring down the cost of a single unit and that is the problem.”