CLICK HERE to View a Summary of the Proposed National City Rent Control Measure
Last week I attended the Economics of Rent Control workshop, sponsored by the San Diego Association of Realtors and Commercial Real Estate Alliance of San Diego. The event was held in the conference room of Ballast Point Brewery off of Miramar Rd. (If you have not visited that brewery, it has wonderful food, beer and atmosphere.) There is a November ballot measure that would repeal the 1995 Costa-Hawkins Rental Housing Act. This act limits local power to enact strong rent control measures. If the November ballot measure passes, local governments could then enact strong rent control measures. National City is already set to adopt strong rent control measures if Costa-Hawkins is repealed.
While rent control sounds good on paper to renters and others as protection against ever increasing rents, and while I certainly sympathize with renters being at the mercy of landlords, if rent control is adopted it would be an outright disaster for the San Diego rental market.
First, as explained by Prof. Norm Miller of USD, if rental rates are capped, maintenance on rental units would significantly decrease. Why would a landlord update a kitchen or bathroom, install AC, or replace siding, etc. if those cost outlays could not be recouped? So rental units throughout San Diego would slowly become dilapidated and in disrepair.
Another issue is that new construction of apartment buildings would slow or stop. The cost of construction in San Diego is of the highest in the nation. It was stated at the talk that nearly 50% of the development cost is associated with just government compliance. As one builder stated “the easy part is the actual construction. The extremely difficult part is the very long process of approval, engineering studies, environmental studies, attorney statements, soil requirements and on and on.” It was stated at the talk that the process towards final approval is a “nightmare”. With the high cost of rental unit construction and the potential cap on rental rates, builders will do one of two things: either build individually owned condominium units instead of rental apartments or leave the San Diego market entirely and build in lower cost areas such as Nevada and Arizona.
Another major issue with rent control is that existing rental units will be sold off. One gentleman at the talk (Dan) owns hundreds of rental units in and around San Diego. (it was stated that Dan rode into San Diego in the 1970’s on a motorcycle with only the shirt on his back and through years of hard work, has built a portfolio of hundreds of rental properties!) Dan stated that he is proud of his rentals and tries to provide a clean unit in good condition for a reasonable rental rate. He likes long-term, happy tenants. However, he stated that if rent control is adopted he will probably start selling off his rental units to homeowners. In fact it is expected that many San Diego landlords will start selling off rental properties.
So what is clear is that, consistent with Microeconomics principles of capping rental rates, the supply of rental units will significantly decrease. Rental units will be sold off to homeowners and apartment buildings will stop being built all together. Existing units will become dilapidated. The solution is to increase the number of rental units in San Diego (some say we need 100,000 additional rental units) but rent control will significantly decrease the number of available units. Other topics discussed at the talk include the expansion of a rental black-market (a rent controlled tenant will re-rent the unit for a higher price), and it was also discussed that government built housing ends up being the most expensive type of housing to build. Another important issue is that existing renters will stay put, which will dry up the availability of vacant units. For a long list of Rent Control negatives summarized from the actual National City Rent Control Measure, please visit CollegeAreaRealty.com.
Finally, I am not sure if you saw the earthquake two weeks ago centered on the 10th floor of 202 C Street, downtown! The City Council has now officially limited short-term rental units to ONLY one’s primary property and only for up to 6 months. Additionally (and quite unexpectedly) there was no exception for Mission Beach where nearly half the properties (many owned by investors) are rented out short-term, typically weekly. So, in order to follow the new regulation, many or even most short-term rentals will now need to be converted to long-term rentals or sold off by the property owner. One thing is for sure is that this battle is now turning into a war. Expect lawsuits to start flying. Also, although the hotel associations are cheering, with so many short-term rental units being taken out of the market, the San Diego economy so dependent on tourism will probably take a small hit, as less tourists will now visit our city. If you are currently renting, call me to start the conversation of transforming to property ownership. This will provide you with an excellent investment going forward and protect you from ever increasing rising rents.