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New York Attorney General Letitia James joins a press conference to support rent controlled tenants who have been threatened with eviction because their landlord has filed for bankruptcy in March.
Andrew Lichtenstein/Corbis via Getty Images
New York landlords are attacking rent regulations in a new federal lawsuit, claiming that capping what they can charge tenants in rent is equivalent to an illegal taking of property.
Last month, housing advocates in New York celebrated sweeping new laws that established rent control permanently and extended tenant protections beyond just New York City, allowing cities throughout New York to opt into rent stabilization programs, which limit how much rent can be increased.
In New York City, those rent caps affect about 1 million apartments, and landlord groups say the regulations not only deprive them of income, but the rules also violate their constitutional rights.
The Community Housing Improvement Program, a trade group that represents 4,000 building owners, joined other landlord plaintiffs in the lawsuit arguing that rent stabilization laws “effect a physical taking of property in violation of the Constitution’s Takings Clause,” according to the suit, citing a clause of the Fifth Amendment.
The suit, filed in U.S. District Court in Brooklyn this week, is not asking for monetary damages, but instead seeks to have New York’s new rent stabilization laws thrown out.
“The Rent Stabilization Laws, among other things, deprive property owners of a reasonable market return on their investment, devalue their properties, and upset their investment-backed expectations,” wrote lawyer Reginald Goeke, who is representing the building owners and landlords.
The suit says those who benefit the most from the rent rules are not cash-strapped, but rather, affluent residents in Manhattan. Because of this, the suit argues, the rent laws “cannot be justified” on the grounds that the regulations help stabilize the cost of living for low-income families.
According to the suit, the laws also encourage tenants to stay in their apartments for a long time, even when a family may need more space. As a consequence, rent stabilized units have low turnover and keep vacancy rates low, which usually means housing costs go up, the suit argues. Taken together, the rent laws are “arbitrary and irrational,” the suit contends.
Courts have upheld rent stabilization laws in New York in recent years and the U.S. Supreme Court has affirmed the government’s right to regulate rent going back to 1921, when the controls were put in place to combat the rising cost of housing.
Yet landlord advocacy groups argue the new court challenge may still have a chance of dismantling rent stabilization laws because, as they see it, the latest batch of New York rent rules are more extreme than past regulations.
Mike McKee, a tenant organizer with TenantsPAC, doesn’t think so. He said the plaintiffs in the case are trying to defeat renter protections with an old argument that has a bad track record.
“They have a very weak argument. They have lost in court with this case for almost a hundred years,” McKee told NPR. “These arguments haven’t won again, again and again. It’s not going to win this time either.”
McKee said landlord complaints that the laws will crimp earnings have been overstated. “They’re still going to make a profit, they just won’t make as much as fast,” McKee said.
Among the reforms in the the tenants’ rights bill signed last month was a measure that eliminated a landlord’s ability to take a unit out of stabilization based on a tenant’s income. Such a change was necessary, McKee said, since thousands of rent stabilized units have been taken out of stabilization over the years.
McKee’s opposition to the lawsuit is joined by New York Attorney General Letitia James, who said in a statement that her office is committed to defending the state’s rent stabilization laws.
James said the tenant protections are “a critical step in reforming the state’s broken rent regulation system — a system that bad-acting landlords have manipulated and controlled for far too long.”
Rent control laws exist in cities around the country, including in New Jersey, California, Maryland and Washington, D.C. Earlier this year, Oregon became the first state to institute rent control statewide.
Our society has shifted, in many ways, to a rental economy. From our personal lives—think Zipcar and Rent the Runway—to our professional lives, such as WeWork, we pay for services on a subscription basis now more than ever. So, it shouldn’t come as a surprise that furniture is following suit.
In 2017, a furniture rental company started from a simple premise—give consumers the ability to furnish a stylish home that fits their lifestyle. Cofounder and CEO Michael Barlow explains the company’s impetus best: “When I graduated from college, I moved around a lot and I always had a personal style bar of what my home should look like. Yet because of these frequent moves, I wasn’t ready to commit to large furniture buys for a multitude of reasons: income uncertainties, roommate changes, frequent relocations. It became clear to me that this mobility and hesitation of ownership was a defining characteristic of many young professionals and one to which the furniture industry had yet to properly cater. Thus, the creation of Fernish.”
Today, Fernish exists to offer furniture as a service. The company operates with an intuitive, self-service, e-commerce platform that offers curated rooms alongside the ability to select individual pieces. And the company has garnered the attention of some major brands to bolster its portfolio, including Crate & Barrel, with whom it has established a partnership, as well as nine other leading manufacturers and wholesalers. What’s more, the company also partnered with a host of coworking spaces and apartment complexes throughout California to allow local residents the opportunity to select pieces in person.
As we look at the model of this residential furniture rental company, it becomes clear that many of its founding principles mirror the core recommendations presented by the Furniture Forum, designed to improve the furniture-buying process for the contract interiors industry. Let’s take a look at some of the parallels, as well as some other enlightening considerations:
Recognize the need for improved pricing models
Barlow explains that one of the core benefits to Fernish’s model is that its pricing structure aligns with the current needs, or perhaps wants, of millennials. “Millennials are used to the subscription model of paying for the things they need,” says Barlow. “From their cell phone plans to their leased cars and even their television subscriptions, today’s younger generation pays for nearly everything monthly. We’ve found that this payment model speaks to what they value most—their need for simplicity.”
Barlow goes on to explain that the subscription models are flexible based on the needs of the client. “Each client pays monthly, and their payment is tied to the duration of the item. We offer 2- to 12-month payment plans with varying price points. At the end of the subscription, clients have the option to buy the product at zero percent financing, swap it out for another product, or cancel their subscription.”
Change will come in the form of process innovation affecting the client experience
Fernish has mastered the art of offering a process that caters to the needs of its users. Recognizing an unmet need within a specific niche market (and a rather large market at that, with current estimates suggesting that millennials’ collective buying power has capped $600 billion), Fernish revolutionized the process of furnishing a home for this millennial-driven need.
Barlow adds, “We see a lot of young professionals relocating—they’ve taken the stigma out of moving frequently and changing jobs frequently. Yet they still want their homes set up quickly, and they don’t have to worry about putting their things together. Fernish is a great service for them to go online, see a room, get it assembled, etc., and to do so within their price range.”
Acknowledging buyer values
Barlow also shares that Fernish operates as a mission-driven organization and strives to align itself with the environmentally conscious mind-set of its clientele. “Our model is designed to make furniture function ‘like new’ for multiple life cycles. We have a very high standard of quality and therefore select pieces that are quality, durable, and modular. We don’t want low-quality ‘fast furniture’ getting into our circulation and adding to the already 10 million tons of furniture that ends in landfills each year—specifically before the end of its useful life. After our products have been through multiple leases and we find it no longer meets our standard of excellence, we donate it. And we’ve found that our clients align well with this environmentally conscious approach.”
Playing to the emotional connection
At the end of the day, Barlow explains, Fernish’s success rests on its ability to make its clients feel comfortable in their residence. He shares that their research has found that many millennials don’t feel at home due to their frequent relocations or the fact that they are delaying first-time home purchases and opting for longer rentals. According to Barlow, this is where Fernish shines. “Everyone deserves to be at home. Fernish helps people feel at home in a way that is personal to them and speaks to the next generation of living.”
Barlow leaves us with this: “As we looked at the next generation of living, we realized that more and more consumers want a home that mirrors what they value. But with Fernish, we aren’t just providing them with a home filled with items that reflect their personal style and values. We’re pairing that physical experience with a process that aligns with their current way of living. And that’s what resonates.”
Classic apartment marketing is becoming just that. What once was considered as being the four cornerstones of sales pitches – the 4Ps of product, price, place and promotion – are being transformed by those digital devices that consumers hold dear to their hearts, and hands in a new way.
Smartphones and tablets continue to define the apartment search experience and shift marketing strategies that are now focusing on choice, convenience, cross-devices and creative story-telling. Dial it in as the 4Cs of multifamily.
“(Mobile devices) have really been a conduit to this change,” LeaseLabs President Steven Ozbun said. “They’ve disrupted this industry that surrounds us.”
The commotion has resulted in a marketing mega trend that is changing the way companies of all sizes are pitching their brands.
Consumers often using multiple devices to search for products. A search for an apartment may start over a cup of coffee on a smartphone and span over one or two more devices before a purchase or commitment is made.
“It’s a fragmented user experience,” Ozbun says. “I’m looking for apt on my smartphone, I hop on my tablet and look for an apartment, then go to my tablet to look at an apartment I just saw on my smartphone. Then I go to laptop to fill out a form because I’m comfortable there.”
Along the way, prospects get very transparent information about competitor pricing and amenities that may sway them in a different direction even if they feel bound by a certain brand. The brand has to be re-enforced and stay fresh by providing multiple options, all of which need to be equally viewable across all devices.
To stay a step ahead, communities must pledge options and an invigorating search experience through multiple devices that address specific prospect needs. The way into the prospect’s palm is through people-based marketing, intricate customer journeys and bottom-line analytics.
“There has been a change in consumer expectations, and the way we can get in front of consumers today has changed, thanks to mobile devices primarily,” said Ozbun, who along with Senior Vice President, Business Development, Brock MacLean recently kicked off a webcast series focusing on multifamily marketing.
Here is a sneak preview of the new 4Cs of apartment marketing, according to Ozbun and MacLean.
Choice of product, and not so much product in itself, is the first cornerstone of the 4Cs. Ozbun cites how Coca-Cola is a good example of how a company that’s already a house-hold name is re-enforcing its brand through multiple flavors. Today’s consumers are not so much concerned about just having a Coke but a specific kind of soft drink tailored to their needs, MacLean says. The company recently introduced a line of specific flavors, which generated $22 million in sales during the first quarter on shelves).
“It’s about giving options to people who are already committed to that brand but want a choice in flavor,” he said.
It’s no longer about price but convenience when prospects are looking for an apartment, Ozbun said. Mobile devices have empowered consumers with fast information, causing their shopping expectations to heighten. Instant gratification and instant satisfaction are the operative words.
“Consumers have this expectation now, I want something and I want it now,” he said. “I need you to deliver it in an hour to my door step and I’ll pay an extra hour. Thanks again to that smartphone.”
In classic marketing product positioning on the shelf was key. Now consumers expect to see product equally displayed on all devices because they migrate from one to the other throughout the customer journey. About 40 percent all transactions begin on one device before finishing on another, Ozbun says.
“If your product is not viewable or available on a smart phone in the same easy way it is on a desktop, you’re going to lose a huge portion of your market share there,” he said. “Especially with mobile usage surpassing desktop and laptop usage, really focusing on that mobile experience and making sure that customer journey is cohesive across all devices is more important than ever.”
4. Creative storytelling
Consumers want to be told a story so they can have some sort of emotional connection with the brand of a product or community. Many brands have mastered creative story telling aided by scrolling-page website architecture. Having all brand touchpoints connected help to tell that story more cohesively.
Ozbun noted that Harvard Business Review recently stated that 64 percent of consumers cite shared values as the primary reason they have a relationship with a brand. Tom Shoes and Warby Parker, two companies that are philanthropic in their marketing, are among those that stand out, he said.
Multifamily has a great opportunity to tell a compelling story because living space is a personal decision. Tell a story, be memorable, MacLean adds. Airbnb with its Bélo proposition and Biscuit’s adventure with HomeAway have succeeded in the vacation rental space with unforgettable campaigns.
“There’s a great opportunity for multifamily brands to come up with some good core values, effectively share that story so consumers feel good about renting or leasing an apartment from that brand as well.”
Reaching prospects through analytics
The path to purchase is a very twisted, fragmented journey today. Google Analytics is trying to piece that journey together through probabilistic and deterministic matching, processes that identifies consumers based on their log-in tracks across multiple devices.
Clean attribution marketing analytics offers greater understanding about how different interactions effect movement along the customer journey. For multifamily, the applications can provide operators will clean leads that are more likely to convert to leases.
“This is game game-changing,” Ozbun said. “It is a big step from where we were. Showing clean attribution modeling has been something that everybody can debate about. This is a step in the right direction to really having a clean understanding to what is driving that first contact and driving that conversion.”
As of July 4, the United States is in the midst of the longest economic expansion ever. Gross domestic product has been growing for 121 straight months, breaking the record of 120 months of economic growth set between March 1991 and March 2001. Our current cycle began in June 2009, and while it’s impossible to know exactly how it will play out, it shouldn’t shock anyone if our industry or the macro economy faces certain headwinds over the next few years.
The good news, at least for the multifamily sector, is that household formation, a key driver of housing demand, remains strong and vacancy rates are still trending below historical levels. According to the National Multifamily Housing Council, 4.6 million apartments are needed at a variety of price points by 2030 to meet demand.
But, how do we prepare for a potential hiccup along the way? Without knowing exactly how the multifamily winds will change, the best advice is to create structures that provide optionality to address unforeseen forces that could impact strategy and execution.
REVERT TO HISTORICAL NORMS
While many markets have experienced (and in some cases are still experiencing) staggering rent growth, underwriting for new acquisitions and developments can’t be predicated on unsustainable metrics. Underwriting should rely on historical norms for rent growth and other variable projections to help create a responsible baseline.
Although it is unlikely that a market disruption would approach the severity of the great recession, at this stage in the cycle, it is still critical to understand the downside risks to assure an investment can withstand unanticipated pressures and allow for the proper upfront structuring options needed to provide future flexibility.
KNOW YOUR TENANTS
Over the last 10 years, we have seen significant narrowing of income-to-rent ratios. Long overdue wage growth, really just seen over the past 12–18 months, has not kept up with the 3-plus percent year-over-year rent increases. As most strategies—even those for workforce housing—include new rent premiums, it is important to understand how susceptible your tenancy is to macroeconomic challenges.
While most investments will still target a traditional three- to five-year hold period, having options to extend the investment life and avoid selling into a challenging marketplace, can make the difference between positive returns and dipping back into your wallet. Consider the following:
If equity partners are governed by a fund life, do they have discretionary extension options?
Can you lock in longer term debt, even if it has a cost, that provides different prepayment options to avoid shopping for a refinance when banks go back into a defensive stance?
Can a property sustain itself with in-place cash flow if conditions don’t provide for projected value-add execution?
Even as investors struggle with current valuations, the real test is residual pricing. Based upon projected value-add execution and organic market rent growth, the resulting top line revenue growth and corresponding increased net operating income—even when applied to conservative cap rates—can generate residual pricing that nears or exceeds replacement cost.
Multifamily investors and developers have experienced success in primary, secondary and tertiary markets alike. But, when faced with challenging market conditions, are all marketplaces equal? We are proactively targeting certain markets, like Minneapolis and Tampa/Orlando, because we respect the in-place fundamentals that we believe will mitigate against future headwinds. Characteristics we look for include positive long-term demographic trends, sustainable job growth, population growth and strong absorption of new supply delivery. Minneapolis has shown remarkable occupancy resiliency in light of significant new supply, and Tampa/Orlando has continued to maintain a Top 5 national standing for job and population growth.
ARE YOU BEING PAID PROPERLY FOR RISK?
Are you getting proper risk-adjusted returns? Due to the amount of capital chasing value-add opportunities, return yields have been compressed. It is difficult to justify taking on value-add risk, with only a few hundred basis points of premium, vs. core-plus opportunities, which have far less repositioning risk.
Sound opportunities still exist in today’s market, but success is much more reliant on well-seasoned operators and foresight into expecting the unexpected.
Bryan Sullivan is senior vice president of investments for The Habitat Co., a full-service residential real estate company in Chicago.
If you’re new to real estate, you know there’s much to learn about the business—especially if you’re looking to rent out your property. To lighten the burden, you might consider hiring an individual or third-party company to help you manage your rental units. However, you’ll want to be exceptionally careful and considerate with your decision, as this person will be a reflection on you to your tenants.
If you’ve never hired a property manager before, you might not know the right qualities to look for. To help you make a smart decision, 12 members of Forbes Real Estate Council, below, discuss some key traits a good property manager should have. Here’s what they said:
Members share a few traits to look for when selecting a property manager.
First, ask yourself if you would trust that person to stay in or rent your home. Trust is often overlooked in business and I believe it should be the foremost thing we look for. – Joshua Fraser, Estated
2. Experience With Your Type Of Property
Hire a professional who has experience with the type of property you acquired. Commercial properties and tenants have different nuances than residential. Even retail will have different issues than an office. An individual with experience will be able to identify value-add opportunities and help increase your NOI due to their knowledge of rent and expense benchmarks for this type of property. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
3. Financial And Accounting Acumen
It is now common in many commercial real estate companies to completely separate accounting and property management responsibilities. Unfortunately, this means there is a large pool of professionals with little to no understanding of financial statements and accounting. Investors should carefully interview potential companies and, if needed, engage the assistance of their CPA in selecting a firm. – Bethany Babcock, Foresite Commercial Real Estate
4. Their Tenant Screening Process
The best property managers are ones who screen tenants by conducting background, credit and reference checks. It’s important to find property managers who are professional, reputable and well-established to keep both the landlord and tenants happy. – Beatrice de Jong, Open Listings (YC W15)
5. Their Turnover Rates And Cost Of Vacancy
Investors often focus on the PM fee. Instead, focus on the turnover process. If your rent is $1,000 and PM is 10%, you pay $100 per month. At 9%, you only save $10 per month. Consider the cost of vacancy. The same unit cost $30 in lost income per day when vacant. “Become” a tenant, schedule a showing and see what this process looks like. If it is cumbersome for you, it will be for your customer. – Timothy VandenToorn, United Properties of West Michigan
6. Their Technology Stack
More property managers than ever before are using technology. But look for the company or individual that offers a full stack of service integrated with technology. You want a property manager who knows how to leverage the data about your property to make precise and proactive recommendations. Plus, if they’ve integrated on-site services, they’ll execute to maintain and protect your investment. – Chuck Hattemer, Onerent
7. Local Knowledge
Despite advances in technology, only so much can be done behind a computer screen. It is important the company or person you select to look after a property has “boots on the ground” and can check on the property in-person. Even better if someone can regularly drive or stop by, as this could catch any issues with the building or community before they become problems. – Joshua Lybolt, Lifstyl Real Estate
8. Ability To Communicate
Pretty much everything other than communication skills is either math, law or logistics which can all be taught and learned, but communication or people skills is the number one thing I look for in anyone representing my interest in a business or property. – Frank Deluca, DCL Healthcare Properties Inc.
9. Billing Transparency
On top of a rate to manage an apartment building, it is important to know the company’s policies for other charges including maintenance, leasing and other activities. Do they send you the bill directly or do they mark up maintenance or other orders? Do they take a fee or percentage for leasing units? Understanding upfront how they charge will alleviate common misunderstandings later. – Lee Kiser, Kiser Group
10. Availability And Responsiveness
Want to be awoken at 2 a.m. by a tenant claiming their toilet is broken? This is why you hire a property manager. Hire a PM that has systems in place to answer and handle calls 24/7. Is the PM answering your calls quickly? You need a PM that dedicates their time to making sure your tenants are happy and your property is being cared for, saving you precious time and preserving your investment. – Angela Yaun, Day Realty Group
11. Values Cost-Effectiveness
There are uncontrollable costs like insurance, mortgage payment and taxes. Then there are controllable costs like turn times, marketing and maintenance or upkeep. So instead of mowing the lawn less frequently, thus affecting your tenant happiness and retention, find a more cost-effective vendor. It is not about eliminating the cost but controlling the cost. PMs who get this win. – Noel Christopher, Renters Warehouse
12. A Long-Term Mindset
Make sure they have a long-term mindset because real estate is a long-term play, not a one night stand. It’s a marriage. So make sure to surround yourself with individuals, agents, property managers and accountants that all have the same mindset as you. Make sure they have your best interest at heart and want to help you accomplish your goals. – Engelo Rumora, List’n Sell Realty
Southern California’s housing market is expensive, both in absolute terms and relative to its household incomes. This creates potential problems in two dimensions: it discourages businesses, who must pay higher wages to attract and retain talent, from growing, and it makes it difficult for workers in low-pay occupations from remaining.
The University of Southern California Lusk Center for Real Estate did an affordability “reality check” at its Orange County Executive Forum in June and discussed broader impacts of homelessness and affordability on the California economy. While Southern California’s problems are extreme, many of our cities that are engines of innovations—Seattle, the Bay Area, San Diego, Boston, New York and Washington—also have severe housing cost problems.
The starkest manifestation of the problems created by expensive housing is homelessness. It is a shibboleth that the homeless are either mentally ill or addicted to drugs. My colleague Gary Painter has shown that more than half of the homeless in Southern California are on the streets for economic reasons like lost jobs, inability to afford their rent or an eviction. Zillow funded a study that finds a strong positive connection between the propensity for homelessness and the percentage of income spent on rent. This, of course, does not include millions of other renters (and even some owners) who are employed and still barely making ends meet.
Housing Lags Employment Growth
Expensive housing reduces living standards. It also may inhibit job growth. Since 2006, which is the last peak period for the California economy, Southern California has added 700,000 payroll jobs. The area is again at full employment, which means there are 700,000 new employees in Southern California who need a place to live.
The rule of thumb is that one net new house is needed for every new job. Southern California has not built at remotely that rate since the last employment peak. This means housing may be constraining the ability of California to attract new jobs.
At the same time, an unusually large cohort of kids are growing up, entering the workforce and leaving home. So, in addition to housing demand brought on by new jobs, young adults are moving out and increasing the demand (this is the subject of USC Ph.D. Sarah Mawhorter’s dissertation.)
The result: Southern California is now unable to house everyone who has a job and is falling further and further behind each year. For people without strong ties (and perhaps even for people with such ties), the best option can be to move. This is producing both an out-migration phenomenon that looks quite different than it did ten years ago—it is not absence of jobs that is pushing people out, but rather cost of living.
In 2008, new members of the workforce were leaving California for Texas in search of jobs. In 2018, they are moving to places like Phoenix and Las Vegas—places closer to family—because unemployment in these cities is low, and so too is the relative cost of housing. One could almost say that metropolitan Southern California is enveloping Arizona and Nevada.
The constraint California is facing can be summarize in one statistic: it has fewer houses per person than any state except Utah. Utah’s high person-to-house ratio reflects a very high fertility rate and, therefore, a large number of children per household. The reason California has so few homes per person is it simply because there aren’t enough homes.
If California and metropolitan areas around the country want job growth, income growth and overall prosperity, they simply can’t have it without more housing.
CHICAGO (CBS) — Accidentally setting off your home alarms seems like no big deal, but it could cost thousands of dollars like it did for one landlord in Matteson.
He says he had no idea he was being charged, let alone racking up a bill of more than $1,000.
Landlord Rob Bermes pays $52 a month for the added layer of protection and says he had the system installed at a rental property after the front door was kicked in at the vacant home.
“The police came out, I think it was about eight times,” he said. “The sensor gets tripped. The alarm goes off. They ask, ‘Do you want police out?’ And I’m like, ‘Yes, I’ve already had someone kick in the door.’”
He had ADT come out and check the system. ADT said it’s working.
But Bermes didn’t realize every one of those eight times police pulled up and found nothing was recorded as a false alarm.
“No criminal is going to hang around and wait for the cops to show up,” he said. “So there’s no way to prove that it’s a false alarm, and I don’t feel that I should have to pay $1,040.”
CBS 2 checked the village’s code on this. Residents have to register alarm systems and are allowed two false alarms a year. Then charges hit.
Bermes said if he had registered he would have known that.
“I would have known that, but it goes back to, is it a false alarm or not? How do you know?” he said.
The village’s police chief clarified a false alarm is a police call out to a residence that is safe and secure with no evidence of tampering.
He said, “I spoke to this landlord and advised that I understood his frustration. I offered to reduce the cost in half. The landlord continued to argue and raise his voice, and after about 20 minutes, I advised him that the offer was no longer valid.”
The chief said Bermes can contest the fines in court.
The chief also released the following statement regarding the situation:
“This landlord called my Alarm Administrator, Cyndi last week disputing approximately $1,500 in false alarms. The Alarm Administrator explained the false alarm process and ordinance, and provided a detailed account of each time an officer was dispatched to the residence from his alarm company, and checked the residence finding it safe and secure. The landlord was very agitated and continuously argued with the Alarm Administrator, then wanted to talk to the Police Chief.
I spoke to this landlord, and advised that I understood his frustration. He argued the legality of the ordinance. I advised him that many cities and villages have similar ordinances. I explained the purpose of the ordinance, which allows for numerous free false alarms. I offered to reduce the cost in half. The landlord continued to argue and raise his voice, and after about 20 minutes, I advised him that the offer was no longer valid, and he had the opportunity to contest the fines in an adjudication hearing, or he can speak to the legal department.”
Bermes maintains that he was respectful and that there is no reason to believe those eight calls were false alarms but says he will register the alarm system.
A bill that would impose a statewide rent cap and restrict evictions moved forward Tuesday, marking a victory for advocates who so far have been struggling to pass legislation aimed at easing the state’s housing crisis.
Assembly Bill 1482, which would restrict rent increases on certain properties to an average of about 10 percent a year and prevent landlords from evicting tenants with no cause, passed out of its first Senate committee hearing late Tuesday. That signals a win for housing and tenants’ rights advocates, who have been trying to push a package of housing-related bills through the legislature, but have watched in dismay as several have been killed or watered down along the way.
“As our homelessness crisis worsens, it is crucial we take steps to keep families in their homes,” the bill’s author, Assemblyman David Chiu, D-San Francisco, wrote in an emailed statement. “This legislation will protect renters from egregious rent increases and predatory evictions while still allowing landlords to turn a profit. Today’s vote shows there is strong momentum in the legislature for increasing protections for California renters.”
His bill had secured four votes in the Senate Judiciary Committee as of Tuesday afternoon and picked up the last vote needed later in the day as committee members who had been absent during the initial vote weighed in. Dozens of supporters and opponents lined up to comment on the measure, which has received fierce opposition from landlord interest groups.
“Our biggest concern has always been that we don’t make a bad problem worse by scaring off development in California,” said Debra Carlton, spokeswoman for the California Apartment Association. “We want balance and we want stability.”
Despite recent changes that limit the impact of the controversial rent cap bill, researchers say the proposed law still would affect millions of California households. AB 1482 could impact as many as 4.6 million homes throughout the state that aren’t already under rent control, according to a recent study by UC Berkeley’s Terner Center for Housing Innovation.
“From the perspective of the number of new units and renters covered, I think the impact could be pretty substantial,” said David Garcia, policy director for the Terner Center.
That impact largely would be felt in cities that have no rent control policies. In cities that already have rent control, the bill would extend protections to households that had been exempt under state law — including some single-family homes and apartments built after 1995 (or later in some cities) but not within the past 10 years.
Chiu put several limits on AB 1482 in the hopes of making it more palatable to the opposition. In addition to only covering rental units that are 10 years old or older, the bill would sunset after three years and landlords who own 10 or fewer single-family homes would be exempt. That last provision not only greatly reduces the impact the bill would have on single-family homes, but it also makes that impact hard to quantify, the Terner Center researchers wrote. Almost 2 million of the estimated 4.6 million California homes that will be covered by the rent cap are single-family homes, but there is no way to reliably estimate how many of those single-family homes are owned by landlords with more than 10 properties, according to the report.
The California Apartment Association seized on that limitation in its criticism of the Terner Center report.
“Over and over, the authors of the Terner Center report announce the limitations of their data,” spokesman Joshua Howard wrote in an emailed statement. “That makes it difficult for us to trust the conclusions in the report.”
AB 1482 now heads to the Senate Appropriations Committee, and then potentially onto the Senate floor. If it passes those votes, it will head back to the Assembly floor for a second vote to approve recent amendments. The bill is co-authored by Assemblymembers Rob Bonta, D-Oakland; Tim Grayson, D- Concord; and Buffy Wicks, D-Oakland.
June marked the 10th anniversary of the most recent U.S. economic expansion, but many of the nation’s most prestigious economists don’t expect us to have an 11th. The reasons range from an escalating trade war with China, dropping manufacturing activity and deep auto industry layoffs to the inverted Treasury yield curve. Commercial real estate indicators aren’t ominous yet, but private real estate investors need a clear view of the risks they may face and must recession-proof their multifamily properties now.
Having the right investment manager is key to risk management in uncertain times, as their business plans will be predicated on assumptions that are achievable — even in a downturn. Also, they will have purchased the asset using reasonable debt levels and will have a risk management strategy for the investment.
Below are three tangible strategies that top-tier managers utilize to recession-proof a multifamily portfolio.
1. Think Diligently, Act Locally
Just as “all politics is local,” so is real estate. In their Beige Book, the Federal Reserve governors said real estate activity is declining in some regions even as others pick up the pace. Much of that activity centers on multifamily real estate: 319,000 apartments (subscription required) are due for completion this year nationwide, which the Wall Street Journal determined is the most new units in about three decades. Local conditions should dictate new multifamily purchases and impact investors’ efforts to recession-proof already-owned properties.
In many markets, capital is chasing assets — the apartment supply is driven not as much by renters looking to relocate as by investors looking for deals. Caveat emptor, or buyer beware. As private real estate asset managers, our team developed an objective risk model for acquisitions and applied it to existing assets. One goal was to see if their market fundamentals were still solid. The most recession-proof markets were regional business centers with broad-based economies. Multifamily real estate in those cities was well positioned for continued population and job growth. For example, Houston has already emerged from an oil industry recession, according to a 2018 University of Houston report. Growth in health care, finance and other sectors picked up the slack.
From our experience, city selection is important, but not sufficient enough to guarantee the success of any one multifamily property. Even in thriving cities, specific submarkets will outperform the broader city. It is a manager’s job to identify these submarkets. Examples are West Midtown in Atlanta or the West Loop in Chicago; both of these submarkets have outperformed their broader cities.
Most important of all are a property’s advantages within its submarket. Proximity to jobs, transportation and walkable retail will drive rental demand in any economic environment. Properties with good locations can be reinvented through targeted capital investments and superior service in any economic environment.
2. Audit Apartments To Spot Income Opportunities
Apartment owners should audit their buildings’ physical space to see if they can support rental growth. Every multifamily property owner should create a spreadsheet showing apartment unit size, contract expiration and annual increases. This rent roll will indicate not only leasing progress, but also market demand — which units are in line for rent increases and which might first need renovation.
If apartment renovations are deemed necessary, use leverage responsibly. Recessions reward owners who have not stretched their credit to the breaking point. Managers should set aside reserves to cover debt service if top-line revenue drops, rather than subject investors to additional capital calls.
Debt can be rolled over into new borrowing only so many times before banks start demanding a premium or dictating more onerous terms. A drop in top-line revenue could result in a loan default and put the property ownership at risk.
3. Give Tenants More — They’ll Reward Attention to Detail
Top-quality owners of multifamily real estate develop programs to ensure positive experiences for their renters. These experiences encompass a property’s physical, virtual and service elements.
For physical differentiation to remain competitive, properties’ units and common areas should exceed those of competitors. Owners with long-term strategies can benefit from capital investments in recessions thanks to lower labor and material costs. Areas for strategic investment include common areas, from multifaceted fitness centers (with yoga studios, exercise rooms and more) to cardio and strength training equipment with 24-hour access.
Services are the newest way differentiate properties. Dog-walking and concierge services are highly valued in higher-end communities. Virtual trainers — a hotel-style amenity that actually started in upscale apartment communities — make workouts more productive and keep fitness amenities competitive economically. Events provide opportunities for renters to form communities with staff and each other, leading to higher lease renewal rates and giving operators the ability to push rents.
Virtual elements include the website, social media and ratings from renters. Multifamily properties’ virtual identities have become critical to their actual performance. Ratings are the first credential potential renters check, and websites and social media are their virtual front door. These areas must receive constant attention and investment.
As competition becomes tougher, local management should focus on retaining tenants. Like any other business, it’s easier to keep current customers happy than to worry about finding new ones. Better tenant relationships will lead to more contract renewals. In turn, positive renter reviews and word of mouth will draw new tenants.
But the true key to out-performance in any market condition is service. Staff in a well-managed multifamily property should already be client-focused. That means knowing tenants by name, keeping the premises in tip-top shape and responding quickly to complaints. A resident portal on the property’s website can simplify rent payments and maintenance requests.
Bottom Line: Act Fast And Before The Fact
A downturn is hard to predict, but trouble looms on the horizon long before economic stress brings it to the doorstep. Due diligence is an ongoing and critical process for all property owners. Using all three strategies and reacting quickly to potential risks properties face will strengthen a portfolio, no matter the economy’s direction.
Oregon is getting national attention for becoming the first state to pass legislation that eliminates exclusive single-family zoning in much of the state. But it could be many years before the landmark legislation has a major effect — if it ever does.
Housing experts on both sides of the fight over House Bill 2001 say market forces and the reaction of developers will play an important role in determining how much multifamily housing gets built in urban neighborhoods that have traditionally been largely reserved for detached single-family housing.
“I think it’s probably more symbolically important than practically important at this point,” said Jenny Schuetz, who studies metropolitan policy issues at the Brookings Institute, a Washington, D.C., think tank. “It takes probably a couple of years before the market really shows how it is going to respond.”
Under the new bill, cities of more than 1,000 in the Portland metropolitan area and those of more than 25,000 in the rest of the state will have to allow up to fourplexes in single-family neighborhoods. Cities between 10,000 and 25,000 would have to at least allow duplexes.
A new triplex is pictured on the corner of Northeast Sixth Avenue and Northeast Ainsworth Street Friday, Feb. 1, 2019, in Portland, Ore. A bill in the state Legislature would change single-family zoning rules to allow more buildings like this in cities looking to grow more dense.
Nearly 70% of Oregonians live in a city subject to one of those requirements, according to Sightline Institute, an environmental group that supported the bill. Gov. Kate Brown is expected to sign the measure.
Assuming she does, it will be a few years before the market even begins to react. The new zoning requirements for smaller cities won’t take effect until June 30, 2021, and larger cities have until June 30, 2022. Cities could also seek extensions to deal with infrastructure problems.
“There are a lot of steps that will take place prior to any actual on-the-ground zoning change,” said Erin Doyle, a lobbyist for the League of Oregon Cities.
House Speaker Tina Kotek, D-Portland, who pushed the measure onto the legislative agenda, has insisted from the start that the measure is aimed at gradual change — not as a single quick-fix solution to the state’s rapid rise in housing costs.
“By allowing a broader array of housing options in areas that are currently exclusively zoned for single-family zones,” Kotek said, “families will have more affordable options than just a big home on a 5,000-square-foot lot.”
Kotek and other supporters have noted that Portland in the early 1990s began allowing duplexes on corner lots in most neighborhoods — and that even today only about 4% of those lots have been converted to duplexes.
Still, changes to single-family neighborhoods could be the most visible in Portland.
The city, in the midst of a boom in apartment construction, is working on its own plan for increasing density in areas now zoned for detached houses. The Residential Infill Program, which has been approved by the planning commission and is before the City Council, takes a big step beyond HB 2001.
The proposal would cap the size of new single-family houses in much of Portland while allowing developers to build more square footage if they provide additional units.
Eli Spevak, a planning commissioner and developer who specializes in denser infill housing, said HB 2001 helps shore up political support for the Residential Infill Program since it requires Portland to move in this direction anyway.
He said he hopes cities around the state “will thank the state for the nudge and political cover to do what we should have done anyway.” But Spevak said he wouldn’t be surprised if many cities still look for ways to get around the new requirements.
Doyle, the League of Cities lobbyist, said cities won’t have a lot of flexibility to avoid allowing at least duplexes on every lot where it would allow a single-family house. However, she said the bill does give cities more flexibility in determining which lots could accommodate larger multifamily units.
Doyle said the league objected to the bill because it takes away local zoning control without providing cities the money to upgrade water and sewer services and other infrastructure to handle increased density.
“I imagine there will be a lot of grumbling” about the measure when the League of Oregon Cities meets for its annual conference in late September in Bend, she said.
Still, HB 2001 puts Oregon at the head of a burgeoning movement to reimagine cities where single-family neighborhoods have long dominated the landscape. Advocates want to create denser residential areas that offer a wider range of housing choices. They also say denser neighborhoods increase walkability and the effectiveness of transit.
In California, there has also been a determined legislative effort to create more neighborhood density in places like the Bay Area and Los Angeles where the middle class has been largely priced out of the housing market. But the drive foundered amid strong opposition from local governments and homeowners who say increased density will hurt the character of their neighborhoods.
Schuetz, the Brookings Institute expert, said Oregon’s success could further encourage advocates around the country.
“Striking down single-family-only zoning sends a strong message,” she said, “that even the exclusive neighborhoods need to accommodate growth and a more economically diverse group of residents.”