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Nov. 16, 2023 - Epoch Times
31:50
Why California's Rent Control Can't Stop Rents From Skyrocketing I Daniel Yukelson
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Despite the fact that California has rent control, rent in California has skyrocketed with a 20 to 30 percent increase.
It's a great short-term band-aid, and when rent control was first created by the federal government around the world wars, they knew it was a temporary measure.
It wasn't meant to be something that's in place for more than 40 years.
And that's the disaster that we've created in the state of California.
These are not appropriate measures to encourage housing and encourage affordable housing.
My guest today is Daniel Euckelson, Executive Director at the Apartment Association of Greater Los Angeles.
Today he'll explain the multiple factors causing rent prices to increase and what needs to change in order to provide affordable housing in California.
Government's shooting itself in the foot.
Property taxes go up every year.
Cost of labor today and supplies because the supply chain shortages are just crazy.
We're in a high inflationary environment, yet cities like LA and Beverly Hills have frozen any kind of rent increases and also made it very difficult for owners To collect rent because of these moratoriums and all that stuff just snowballs and the costs have gone up and when owners do have a vacant unit, just to stay afloat, they need to increase their rent in that kind of environment.
I'm Siamar Karami.
Welcome to California Insider.
Thank you.
Thanks for having me.
We want to talk to you about rents and rent control.
One of the things that we've seen is that California rents are up through the roof.
Some statistics say over 20%.
Anecdotally, what I've seen, some places the rents are up 30%.
We also have the rent control in California, which is supposed to be 5% plus inflation, which shouldn't be more than 10-12%.
We want to talk to you about this.
What are your thoughts on rent being up?
Is there any reason that you say...
Well, you have too many people chasing too few units that are available.
Since the 1970s, since we started implementing all these regulations like rent control and just cause eviction and right to counsel, The construction in the state of California has really stopped in terms of multifamily housing because the regulatory burden is just too excessive.
And there's very little upside for developers to go into a market and build more housing, particularly affordable housing.
And what you're seeing by large rent increases, number one, it's always been a supply and demand issue.
And the regulations have not only stifled more housing construction, but it's really forced a lot of people to want to get out of the business.
And we're seeing that even more today after having two years of eviction moratoriums.
And in some jurisdictions, freezes on any rent increases.
And what people need to understand is the majority of apartment owners in the state of California, something like 82%, are what we call small business mom and pop owners.
These are people that have made passive investments in rental properties.
Perhaps own four to eight units, typically one building, sometimes two.
And they really made these investments for their retirements.
Rather than taking a risk, putting their money into stocks and bonds, on Wall Street they decided to invest in real estate, which traditionally has been a very stable It's a great business to be in in the United States and there's always been upside on your investment.
You build equity over the years and when you need it in your retirement you can sometimes sell the property or it's something that gets inherited by your children down the road.
These people are really part-time operators.
They're like me.
I own six rental property units and I have a full-time job.
And so these people can't keep up with all these regulations and they're literally running scared out of the business.
They're selling their properties.
These properties are either being converted to condominiums or being redeveloped into luxury buildings.
And, you know, that's really what's been added to the California market these days in terms of rental property are these high amenity luxury buildings that have extremely high rental costs that the average person Can't afford.
The price of land, the price of construction, because of all the regulations in California make it so expensive to build, it costs something like $650,000 to $700,000 just to build a one-bedroom unit today in California.
And most people can't afford that.
That turns into very high rents.
And so we're not building affordable housing and the rents are increasing because what's coming online are very expensive luxury apartments that, you know, we really don't need so much of that in California.
We need more affordable housing and the government needs to get together with the industry and provide some incentives to build something more affordable.
Now one other phenomena that we have seen is that the vacancies are very low.
So meaning that a lot of the houses are full of, you know, there's not that many apartments available on the market for rent.
And we are hearing that there's multiple offers.
So you list an apartment for rent and you get like 50 people coming and applying.
Why do you think these vacancies went up?
Is it because of the eviction moratorium?
Something happened.
Well, all of a sudden there is...
Yeah, absolutely.
And, you know, we're now coming out of this two-year cycle of the pandemic.
But what we saw and, you know, my one four-unit building is a case in point.
I had a vacancy early on in the COVID days back in mid-2020.
And I was very concerned when my tenant decided to move out and go live outside of Los Angeles.
A lot of people were leaving urban areas.
And I also own property further north, and I saw a huge demand up in areas like Santa Barbara and San Luis Obispo County because people just wanted out of the city.
They did not want to live in these small boxes and be so closely cohabitating with other people when people were getting sick.
And so I was fortunate I ultimately did lease my vacant unit back then, but I literally got two or three people to look at it, and just by luck I happened to find somebody.
But it took me over 30 days to lease it, which is unusual in the Los Angeles market.
Now fast forward, just last month I had another vacant unit.
And I had incredible demand.
I had literally 20 people making inquiries.
I showed it just on one day, on a Sunday, and I had 15 different people show up to this and I leased it the next day.
I continue, even though I've taken it off the mark, I continue getting inquiries about that.
So people are moving back into cities like Los Angeles.
I spent a lot of time in New York last year.
I saw it there.
That city is about 70% back, and more and more people are being required to report to work.
And now coming back and living in that city, leases are way up in the city of New York, just like they are in the city of Los Angeles.
And I'm certain it's got to be the same in other large cities like San Diego.
One of the questions that comes to mind is like, what happened?
Like two years ago, three years ago, before the pandemic, it wasn't like this.
You wouldn't get like 50 offers or 30 offers.
And then I don't know if the construction stopped.
Do people want to have more room?
How did the housing...
Well, for existing housing, going to periods before the pandemic, there was a pretty strong demand.
Consistently in LA, the vacancy rate has always hovered around 3%.
And so when owners would list properties, and of course it varies by area, but when owners list properties in certain areas, they would have major demand on those properties.
And so we've always had a very robust rental market here in California, and it's now picked up again.
The rents are going up so much, and this is going to change people's lifestyles.
If you have to pay 30 percent more, 25 percent, it's a necessity to have a place to live.
Absolutely.
You either have to cut back, get a smaller unit, which will change your lifestyle, or you have to cut from other discretionary Items that people are spending on vacations or other things.
Is there other factors that is causing this?
We have the rent control, which helps the people that are in certain units to stay there.
The people that are living in units do benefit by rent control because the rent increases are limited year to year by the government.
Those limitations, by the way, also benefit renters who may be wealthy and can afford to pay more rent.
So it's a real detriment to these owners who are subjected to this rent control.
One of the issues with rent regulations like that is that people tend to stay in place.
You know, when your rent is very cheap, You're very reluctant to move, so studies have shown that people have at times been offered job opportunities, but they don't want to move because they don't want to give up that rent control department.
You find situations where a mom who may have had, you know, been married with three kids, kids have grown up, moved out of the house, the mom's now divorced, living in a three-bedroom apartment alone, which Then creates a shortage for the next family that needs a three-bedroom apartment like that,
but the single mom can't possibly find a one-bedroom apartment that's less money than the three-bedroom apartment because she's been in place for 30 years under rent control and her rents are way below market.
So you have a lot of situations like that.
I know you've mentioned that rent increases have been 30%.
One of the issues is because of COVID, rents actually dropped 15-20% depending on certain neighborhoods that you're in.
And so some of those increases may be catching up at this point, but in no way are we seeing just straight 30% increases for new units that are being put on the market today.
And it could be the less urban areas, like Orange County, San Diego, those areas...
In areas like Riverside County, San Bernardino County, the Inland Empire, Bakersfield, where there's been a big boom and people moving outside of urban areas like Los Angeles, yeah, rents are going up because of the demand there and the lack of rent control regulations.
And what's happening is, even though the rents have gone up that much, one thing that I've thought about is that The majority of people are still not paying that rent because of the rent control.
The new units, people that rented these units, because there's a limited number of properties out there in the market, people are paying those high rents.
Majority of people are still not paying those rents.
For the majority of properties, the majority of rental units in California today, you're dealing with typically older buildings.
And these buildings are a lot more affordable.
You're not seeing huge rent increases in these older mom-and-pop buildings.
What you're seeing is these luxury buildings that they're building in downtown Los Angeles all the time, coming online.
Yeah, the rents for, you know, one bedroom, two bedroom are much higher than the average rent you'd pay for a C&D class building, which, you know, a lot of our members tend to own.
But do you think there's vacancies for those C&D buildings right now because of the eviction moratorium?
It looks like something has happened with the vacancies.
So when there is one unit, there is a bidding war over it, and then people are willing to pay a lot more.
It's interesting.
When COVID started, you know, renters who had been living in these high amenity buildings decided that they're going to go seek out these older buildings.
So what you had is you had a vacuum of people leaving these high amenity buildings.
People leaving the LA area in general.
So as these older buildings tended to empty, the renters from the high-amenity buildings tended to fill up those vacancies.
These are wealthier tenants taking over these rent-controlled units.
And because they're larger, they're willing to give up some of the amenities, they're cheaper.
We also saw a big trend of tenants Finding roommates, some moved back home, but you know all that's changing now because employers are asking their employees to come back to work part-time, full-time, and so there's more and more demand building up in cities like Los Angeles.
Because there is a panic.
A lot of people are seeing these things now.
And they're panicking about the house prices, about the rents.
And the question is, is there a point where...
But the other question is, why do rents need to increase?
And part of the problem is, again, government shooting itself in the foot.
All these regulations are very costly.
Virtually every time a new regulation is passed, They provide renters with a right, a cause of action against the owner.
Oftentimes, tenants threaten to sue for various things like these vague anti-harassment laws that the city of Los Angeles imposes, and owners then have to end up settling out of court rather than going through a long legal battle.
This litigious Society we have here in California, all the various fires have shot up everybody's insurance rates.
The cities like Los Angeles and also because of state law have increased trash hauling fees and sewer fees.
Cities like LA, their trash hauling fees a few years ago went up 200-400% for most rental property owners because the city decided to offer monopolies to trash haulers.
And they've consistently gone up, you know, high sixes, low seven percents ever since then.
And part of that is due to California's new regulations.
So those are increased costs.
You know, property taxes go up every year.
Cost of labor today and supplies because the supply chain shortages are just crazy.
We're in a high inflationary environment, yet cities like LA and Beverly Hills have frozen any kind of rent increases and also made it very difficult for owners to collect rent because of these moratoriums.
And all that stuff just snowballs and the costs have gone up.
And when owners do have a vacant unit, just to stay afloat, they need to increase their rent in that kind of environment.
So those costs are showing up in the housing for people.
Absolutely.
But people don't really see them.
And then the elected officials sit back and go, why are rents increasing?
Well, it's because of all these regulations that get imposed on rental property owners.
They're burdensome.
And as I mentioned, it's really making a lot of people really rethink this business.
And a lot of them are getting out of it.
See the smaller owners, which make up the largest number of member households in our association, as a leaky bucket.
You know, they're streaming out of California.
They're moving their money elsewhere.
Some of them are just putting their money into REITs so they don't have to deal with all the hassles of day-to-day management of these properties because of all the conditions being imposed on them.
You touched on the fact that when people have rent control on a house, on a home, whether it's an apartment or a house, they live their life.
And I've seen that myself.
I've anecdotally had a friend that actually, because she had an apartment on the beach, everything she did was because that cheap apartment was there.
Right, right, absolutely.
Her life was about that instead of going and getting a career and doing something and earning more money to get a better apartment.
This mobility itself, like having rent control limits people's mobility, doesn't it also create low vacancies?
Well, absolutely.
As I mentioned, people are reluctant to leave.
And so their apartment is not available for the next family that needs to move in, that needs housing in the area.
You mentioned a friend in Santa Monica.
You know, we constantly hear stories about this, about the renter that has this place a couple blocks from the beach in Santa Monica or some other beach community, Venice or something like that, and they never give up that apartment, even though they've, you know, over the years, their careers have taken off, they make plenty of money, and they buy their own property, but they're not giving up that cheap rent-controlled apartment because they want a beach pad for the weekend.
Stuff like that is ridiculous.
Our association has been pushing for years to have means testing for rent control.
It's not fair to property owners that everybody in the world should be benefiting by these Rent protections.
People that really need those protections should benefit by it.
And if that were the case, rents would be able to stay much lower because owners would be able to charge the market rate to tenants that can afford it and be subjected to rent control to kind of help out the community and help out the people that need it.
But it's just not that way.
And in fact, with some of these freezes on rent increases, they were made available to everybody.
So whether you're paying $10,000 a month for, you know, a three-bedroom penthouse near downtown or, you know, $1,500 for a single, you benefited and you haven't had a rent increase in two years.
And, you know, you got at least another year, maybe even longer in the city of LA to benefit by that.
And, you know, all that stuff just impacts the owners terribly on their finances.
And also other people that want to get that property.
Right.
Absolutely.
Absolutely.
So how are the politicians looking at this?
Is there any...
The problem is, I don't think they understand it.
Look, I'm old enough to remember the 70s when we had gas shortages.
And because of that, you know, supply and demand, gas prices started going up.
And so the government...
In their infinite wisdom, this is the federal government this time, decided to control the price of gas.
Well, what happened?
You know, we had long lines at the gas pump.
Gas stations were running out of gasoline.
You could only buy gas on designated days.
And it was a disaster.
But, you know, we've been doing this for 40 years to our housing here in California.
And where has it gotten us?
Well, we have extremely high rents when there's a vacancy.
We have vacancy control, thank God.
We have the worst homelessness crisis in the country, without a doubt.
Cities like Los Angeles are a disaster.
San Francisco is a disaster.
And those are both cities that have had rent regulations.
These draconian rent regulations in place for 40 years.
And we have the biggest housing shortages.
That's what these regulations have gotten us.
Go to states like Texas, they're building more than they need.
And in some cases, rental prices are going down.
If not for all the Californians moving there now, rent prices would go down.
But you see in other instances, cities like Sydney, Australia, they put so many new rental housing units online, rent prices have actually decreased.
It's a complete supply and demand issue, and it's unfortunate that our politicians have never taken an economics 101 course.
They just don't get it.
If you ask an average politician about what does EBITDA mean or anything like that, they couldn't answer that question.
They've never been in business.
They've only been in elected office.
They've never...
I had to be responsible for a budget or anything like that, and so they just don't get it.
They're talking different languages, and it's all about pandering to tenant voters, which, you know, there's a lot more tenants in the state of California than there are rental property owners, and that's the unfortunate reality.
So instead of building new housing and allowing for a lot more development, It's more about, let's control the price of what we have.
But at the end of the day, it doesn't work because we need more.
It's a great short-term band-aid.
When rent control was first created by the federal government around the world wars, they knew it was a temporary measure.
It wasn't meant to be something that's in place for more than 40 years.
And that's the disaster that we've created in the state of California.
These are not appropriate measures to encourage housing and encourage affordable housing.
Right after World War II, we had a huge building boom here.
I mean, that's when my family moved from the East Coast to come to California.
It was the golden state back then.
We built tons of workforce housing.
We knew millions of troops from overseas were coming to California to live.
We work in the defense industry, work in the many industries that we have here in California.
And so we built for it.
And there was a lot of housing to go around.
We just have not built workforce housing in many years.
And it's hurting our businesses, too.
Any hotel that is developed, it's impossible to hire a workforce.
It's extremely challenging.
We need to really face reality in this state and do something about all these regulations that just increase the cost of development, of important development, such that it's not happening anymore.
So are you saying when a politician comes out with these policies of rent control, that they will attract voters because they're saying, oh, I'm going to lower your rent, I'm going to control, versus coming up with a solution that it's much harder to do the development side?
The politicians, local or statewide, Just don't appreciate that we're in the housing business.
We've sacrificed for years to be able to afford these rental properties so we can house people in our community, and they just don't get that.
We are not in the eviction business, but that's how they like to play us.
I always say that the only thing politicians haven't done to people in the rental housing business is painted us with horns and a tail.
Because they try to really make us out to be the adversaries, the evildoers of the state.
And we have literally put all of our resources into operating these properties so we can house people in the communities that we live in.
That's why we're in this business.
And it's just unfortunate that there's no credit ever given to people that are housing providers.
Now, there's another phenomenon that happened during the pandemic, especially in LA. Some people were doing rent strikes, and there was this tension between tenants and landlords, and some people wanted to get their rent forgiven.
What are your thoughts on this?
Do you think this is something that the politicians are pushing?
Well, it's absolutely encouraged by these regulations, and many of these Anti-tenant harassment regulations and these eviction moratoriums that were put into place, it really created a reluctancy on the part of rental property owners to want to communicate with their tenants.
They were scared to communicate with them.
And so these things like rent strikes happened because of that.
And it's just an unfortunate, unintended consequence of all these regulations.
They were all poorly thought out.
What should have happened from the very beginning is the government should have stepped up and provided rent to those who needed it.
But instead, they said carte blanche to renters, you know, if you say you're impacted, you don't have to pay rent.
And so private property owners were left holding the bag here.
We were forced into providing private welfare to people.
We're forced into providing our housing services for free.
No other industry That I'm aware of, not the supermarkets, not your medical professionals, not your car dealers.
Nobody was forced to provide their goods and services for free.
It was just the housing providers.
And so it was really incumbent upon the government to step up and provide rental assistance to those who needed it, those who were truly impacted.
And the phenomenon that we did see once the state passed Their rental assistance program, the Housing is Key program, is once tenants found out that the state was going to pay their rent through federally subsidized dollars, more tenants stopped paying.
I've heard so many stories from owners that their tenants were making payments up until that program was launched, and then they said, I'm just going to apply for state relief.
And so we see that all the time.
We also see a lot of instances where tenants just did not want to cooperate, and the owners were unable to get them to apply for rent relief, or tenants that moved on and just left the owners holding the bag of $40,000 to $60,000 in lost rent.
And it was unfortunate.
The government reacted way too late.
They launched this Housing is Key program, and they're still struggling to get out the dollars, even though the website was shut down at the end of March.
They've only handed out something like 35-40% of the money that's been allocated to them, and they're begging the federal government for another $1.9 billion to add to the $5.4 billion.
They originally got and they're way oversubscribed and they'll probably be doling out this money for the next year and then we'll probably hear all the stories like we did with EDD about all the fraud and all the prisoners that got rental assistance out of this fund.
Our owners have seen it.
Our owners have seen the fraud on the part of tenants.
Not being upfront about what they truly make, not being upfront about the trust accounts that they have or the savings accounts they have they could have paid around or the fact that they've been working for the past year or two.
So we'll start to see those types of stories come out in the news, I'm sure.
You mentioned that some of the investors may want to leave California.
What do you think the impact would be on how it is here, like the housing?
Well, I wouldn't say may.
I would say they are leaving.
The unfortunate thing that's going to happen is you're going to have these big faceless corporations take over these small properties.
These properties will be redeveloped, and as I mentioned earlier, they'll be converted to condominiums or redeveloped into higher end.
There'll be more density placed in neighborhoods because of that, and that'll change the dynamics of neighborhoods.
We're going to lose these old, original buildings from the turn of the last century and also from the mid-century, from the 30s to the 50s.
It'll really change neighborhood characters because of that.
You're going to have these corporations who are less willing to work with tenants.
Hear from owners that, you know, I haven't wanted to raise rent in the last five years.
You know, I feel these tenants are like my family.
I don't want to have turnover.
Turnover is expensive.
I have to, you know, upgrade the unit.
And it's very costly.
And I'd rather just keep people in place.
I don't like to market it.
I don't like to show it.
And, you know, that's the mentality of a lot of these small owners.
But, you know, we're No matter what size, they're all grouped together as these big faceless corporations.
And they're not.
A lot of our members and owners are retirees, former teachers, former first responders.
Many of them are recent immigrants or first-generation Americans.
Every given day, we engage our members in Chinese, Korean, Arabic, English, Spanish.
They're from all walks of life.
A lot of them own, you know, properties so they could house their families and also have renters to kind of offset some of their housing costs while they struggle to get a footing in this country.
And so we're going to lose all that, and that's not going to be good for the long run.
Do you have any other thoughts for our audience?
Well, look, there's a lot of different ideas we could deploy to deal with this housing shortage and particularly the affordable housing shortage.
We need to cut through some of these regulations.
We need more government incentives.
There needs to be more tax incentives.
The government tends to use the stick rather than the carrot when it comes to developing affordable housing.
As I mentioned, we need to look at micro-units.
We need to look at converting some of these old rundown motels for homeless housing, provide wraparound services at these facilities so we can get people off the streets.
We need to look at mixed-use developments.
We need to build more density where it makes sense, particularly around transit zones.
And, you know, those types of things have continued to fail In Sacramento, those ideas never get passed.
We need more government joint ventures to help offset some of the costs of building some of this housing.
And we also need CEQA reform, the California Environmental Quality Act.
I was a planning commissioner for six years in a small city, and I know what it's like, what you have to go through to put together some of these CEQA documents.
They're thicker than a phone book, and I always thought they were the most ridiculous thing in the world, but it basically opens up a developer to litigation from any neighborhood group, and oftentimes good developments just don't get developed because of it, and it also makes development a lot more costly.
And so we need to deal with that.
We need to basically give exemptions for any type of affordable housing here in the state.
And we need to just really make a conscientious effort.
We need a task force just focused solely on housing development in the state of California.
It's the only way we're going to be able to moderate rents, the only way we're going to be able to provide enough housing for the demand that we have in the state.
Otherwise, we're just going to keep chasing people out of the state of California, real estate investors and You know, wealthy people.
The state is losing tons of millionaires every year.
And no one's going to be left to pay the high taxes we have here.
It's a huge problem we're facing.
Daniel Ukelsen, Executive Director of Apartments Association of Greater Los Angeles.
It's great to have you on California Insider.
Thank you.
It was a lot of fun.
Thank you so much for watching.
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