By Adam Pagnucco.
In Parts One and Two, my real estate sources commented on the impact of the county’s new rent control law on new construction. These are the people who are directly engaged in the businesses of owning, managing, developing and/or financing real estate. Today, they begin commenting on this question:
Question 2: What will rental unit owners do with their existing properties? Will they sit on those properties, sell them, convert them to condos or redevelop them to trigger the 23-year exemption for new construction?
Source 1
Dampening income increases will dampen capital repairs and investment. Condo conversion will once again become popular with apartment assets.
Source 2
I think it will depend on the age of the existing property. Some will defer maintenance etc. Others may focus on capital improvements that will justify increases. Do not think you will see a lot of conversions. Smaller landlords will likely sell rather than deal with the complexity and hassle. One friend who owns a number of single family dwelling homes has said exactly that. Going to sell.
Source 3
Turnover rents will go up today to have higher base numbers for going forward, as much as market will bear for whenever it kicks in. Month to month and firm term leases are treated the same so if month to month you’re gonna try it higher than a lease for same reason. Assessment appeals guys and gals will be driving Lamborghinis on money made on tax reductions. Tax court will be busy busy!
Source 4
There will be a handful of condo conversions and a few buildings that get major renovations or redevelop to reset the 23-year-clock. Some buildings will get sold to affordable housing non-profits or even for-profit developers who will take advantage of various subsidy programs to renovate them and rent them to low-income tenants.
Source 5
The Council really screwed tenants with this bill. By not making it effective until sometime in 2024, housing providers are going to push rents up as high as possible before increases get capped. In the race to appease some interest groups that don’t understand the intricacies of complex legislation, they all ended up badly hurting the people they thought they were helping.
As what happened in San Francisco, operators of older naturally occurring affordable multifamily housing woke up on Wednesday and started running the numbers of tearing those buildings down and replacing them with high end apartments. We know that some percentage of tenants will lose their homes to building replacement and condo conversions only to be forced back into a housing market with severe shortages.
Source 6
The unintended consequences are going to be fast and wide-ranging. Assuming inflation stays somewhat sticky and the CPI-U stays in the 2% to 3% range, the county has now guaranteed our lowest income renters an annual rent increase of 5% to 6%. The leverage between landlord and tenant had already swung back to the tenant post-COVID. The politicos and general public ignore the downside to a landlord of having an empty unit. Turnovers are expensive. Maxing out the rent is often way down the list of priorities for landlords. Now, landlords will simply default to the cap and there will be no more negotiation. In a strange way, landlords may actually come out ahead! Older multifamily assets will no longer trade hands and the county won’t be able to collect the massive transfer & recordation taxes. Condo conversions are unlikely due to structural changes that came about after the great recession (Dodd-Frank, etc.). Every landlord will appeal their assessments reducing the county’s property tax base. No office conversions will occur either which other DMV jurisdictions are starting to capitalize on.
Source 7
Short term: I have spoken to several property owners who have pre-2000 properties, where they have kept the rents lower to keep turnover down. They are looking at immediately raising the rents on vacant units by $75 to $100 dollars a month.
Mid term: It can be expected that these rental apartments will shift their approach to leasing:
- Pushing up rents on existing tenants in the 3-4 years leading up to crossing the deadline and falling into rent controls.
- Pushing out marginal credit tenants who are stretched to meet the new rents — made easier by the reduction in new units.
- Conversion of rentals to condos where feasible.
- Eliminate upgrades rather than go through what will be bureaucratic friction.
- Shifting to a minimal maintenance schedule.
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My sources’ comments on existing rental properties will continue in Part Four.