Few topics have drawn more heated discussions throughout the Silicon Valley real estate industry than the ever-changing and increasing rent control efforts happening all across the region. From 2011 to 2016, the median wage in San Francisco, Santa Clara, and San Mateo County rose by 14%, while the median apartment rent jumped by over 42%. This has led to a large percentage of tenants allocating at least half of their income towards rent. To make matters worse, there have only been approximately 80,000 homes constructed during the last ten years, while approximately 100,000 jobs have been added per year. The competitive Bay Area rental market has initiated a push for more affordable housing and has forced local leaders and city councils to introduce new ordinances to combat the issue. Cities walk a fine line in implementing ordinances to provide affordable housing to tenants, without overreaching and interfering with a landowner’s property rights.
Most recently debated were San Jose’s rent control ordinances at a San Jose City Council meeting that took place on November 14, 2017. Several changes were proposed, including raising the annual percentage rent increase cap [what does the rent increase cap mean, do not assume the readers know]. The increase cap was previously lowered in 2016 from 8% to 5%. In a 6-5 vote , the San Jose City Council decided to keep the annual rental increase cap at 5%. Landlords claim that the current annual increase does not provide sufficient funding for expenses to maintain the property, and were seeking to link increases to the Consumer Price Index, allowing them to pass some of the maintenance costs on to tenants.
In addition to tenants in the region suffering from rent spikes, corporations are struggling to provide affordable and logistically sensible housing to employees, and turnover is high as a result. Emmett Carson, the CEO of the Silicon Valley Community Foundation, said in a recent interview: “We are losing our competitiveness against places like Austin, New York, Seattle and L.A. because of the housing issues. For every job we have in the community, we need a place for that person to live in that community. We don’t have that now and our regional balkanization prevents the kind of regional approach that we have to have.”
In an effort to meet employee housing demands, we have seen an influx of corporations purchasing multi-family properties. While these acquisitions have good intentions, they come with their own slough of problems. For example, corporations purchasing properties subject to just cause ordinances face a complex issue if the property comes with existing tenants. More specifically, San Jose’s tenant protection ordinance, adopted on May 9, 2017, provides for a list of 12 just causes a landlord can use to evict a tenant. In this instance, there have been disputes lately as to whether corporations are able to use the “owner move-in” cause to evict existing tenants and move in their employees.
The argument in favor of this qualifying as just cause is that employees are technically members of the corporation, thus constituting an owner move-in. Another possible option is that employee housing may constitute the property being taken out of the rental market, thus invoking the Ellis Act. The caveats to these causes for eviction are that the corporation will be subject to supplying relocation assistance to current tenants and return any security deposits. In large apartment complexes and multi-unit buildings, this expense can cost corporations a significant amount of money. This issue, amongst many others, has yet to be heavily litigated, and should be monitored closely considering its effect on commerce in the area.
Perhaps the most concerning trend to property owners in the region is the momentum gathering towards a repeal of the Costa-Hawkins Rental Housing Act. A repeal of Costa-Hawkins would result in single family dwellings and newly constructed units being subject to local rent control ordinances. Although on its face it sounds beneficial for tenants, the repeal of the act may result in fewer and fewer landlords introducing their property to the rental market out of fear they will not have control over the tenancy. Landlords and tenants alike should pay close attention to the current rental market and the laws being introduced. 2017 saw several changes concerning rent control implementation, and we believe 2018 will be no different.