Multifamily landlords and brokers in California are breathing a sigh of relief after residents voted against a ballot measure that would have expanded rent control in the state.
Proponents of the Justice for Renters Act, or Proposition 33, said the measure would help in efforts to increase affordable housing, while opponents feared it could have the opposite effect by stymieing new development and suppressing property values. It was the third time the measure was put before voters.
“Let’s hope this time around, defeating Proposition 33 will be, to coin a baseball term...'three strikes and you’re out,'" the Apartment Association of Greater Los Angeles said in an email to members, while other industry executives including Highlight Real Estate's Josh Kaplan and Jake Glaser of Glaser Group Multifamily posted celebratory updates on LinkedIn.
If passed, the proposition would have allowed California cities to impose rent control on a broader range of housing, including single-family homes and newer apartments, potentially exacerbating declining development in Los Angeles, real estate professionals tell CoStar News.
The measure's failure comes as local apartment developers are scaling back construction amid rising expenses and slower rent growth projections, with multifamily openings down 30% year-over-year during the third quarter to 2,930 units, according to NAI Capital Markets research.
"This will bode well for multifamily investment in Los Angeles, providing clarity in this rapidly changing investment landscape," Kevin Kawaoka, executive vice president at NAI Capital Investment Services Group, told CoStar News.
Market forces
Proponents, such as nonprofit housing developers, argue Proposition 33 would strengthen tenant protections at a time when California residents are spending up to 40% of their income on housing. But multifamily experts like Kitty Wallace, vice chair at Colliers, claimed policies like Prop 33 would limit a landlord's ability to raise rents between tenants, putting a serious dent in potential profits and prohibiting development.
“The best thing to do is to let people build things," Wallace told CoStar News.
Apartment supply is shrinking in Los Angeles as demand is growing, bolstered by residents opting to pay rents over often high-priced mortgages, with the region's vacancy rate falling to 4.9% in the third quarter from nearly 5.1% a year ago. Demand in Los Angeles is outpacing the rest of the country, with the national vacancy rate hovering at 7.9%.
The median cost of a single-family house in California, meanwhile, will reach $909,400 in 2025, up 4.6% from this year and significantly higher than the current national median price of $412,300, according to the California Association of Realtors.
About 22,381 multifamily units are under construction in Los Angeles, down 5% from a year ago, according to CoStar data. Higher interest rates and construction costs, coupled with regulatory headwinds like the so-called Mansion Tax that places a 4% levy on real estate sales above $5 million in the city, have contributed to fewer multifamily construction starts, brokers note.
Prop 33 would have put a dent in future profitability for apartment developers by preventing landlords from charging market rents between tenants, according to Wallace, thus discouraging future development.
The AIDS Healthcare Foundation, a nonprofit organization that operates low-income housing in Los Angeles, is driving the push for rent control in California and has sponsored unsuccessful rent control measures in California in 2018 and 2020. More than 100 elected California officials backed the measure as a tool to help alleviate the state's housing crisis, and similar measures have been passed in Portland, Maine, and in St. Paul, Minnesota, according to CoStar News.
“With Prop 33 off the table, the focus can now return to the fundamentals that make multifamily investment in our region so attractive,” said Nuriel Elisha, an investment associate at the SK Group of Marcus & Millichap in Los Angeles.
Addressing a need
California has a lofty goal of building 180,000 houses annually to meet demand. That's a far cry from the 80,000 homes built on average each year over the past decade, according to the state housing agency.
Los Angeles is required to build more than 50,000 homes each year on average through 2029, about 40% of which are to be affordable, or built for those earning between 30% and 80% of the area median income.
Among local affordable projects in the works is a conversion of a 54,000-sqaure-foot former grocery store at 1355 N. Avalon Blvd. into a 55-unit supportive housing property in the Wilmington neighborhood of Los Angeles. The Richman Group of California and Richman Property Services teamed with Brilliant Corners for the project, with financing from the Los Angeles County Development Authority and the Los Angeles County Department of Mental Health.
The project is “an important step toward addressing the local affordable and supportive housing need,” said Rick Westberg, executive vice president at the Richman Group, in a statement.
Los Angeles’ current zoning regulations are insufficient for the city to meet its affordable targets, according to Kawaoka. He pointed to a successful working model in San Diego, where a revamped process has led to "healthy development within the city," Kawaoka said.
The county is fast-tracking housing projects that are 100% affordable through a streamlined, 30-day permitting process that has resulted in more than 1,200 homes in the pipeline.
"If our neighbor 111 miles away can do it, so can we," Kawaoka said. "We will be depending on leadership in order to solve this housing problem through systematic changes."