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After years of dramatic increases, rents are finally showing signs of slowing

After years of dramatic increases, rents are finally showing signs of slowing
Oceanwide Plaza and Circa, both along South Figueroa Street in Los Angeles, were under construction in December 2016. (Marcus Yam / Los Angeles Times)

After a remarkable run-up in housing costs that has crimped budgets, forced families from their neighborhoods and contributed to homelessness, it appears rent growth is slowing in Southern California and across the nation.

Experts attribute the tapering in part to an increase in new apartment buildings that, although not giving tenants the upper hand, is giving them a bit more leverage than in years past. And after years of steady increases, some renters are simply unable or unwilling to stretch further, with the richest among them choosing a mortgage instead.

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“There is only so much rent you can get,” said Cynthia Wray, senior director of acquisitions for ‎FPI Management Inc., which manages 75,000 apartments in California. “At a certain point you can’t go any higher.”

The latest evidence of a slowdown came Thursday, when real estate firm Zillow released data showing the national median rent for a vacant apartment dipped in August from a year earlier. It is the first time that’s happened since 2012. In Los Angeles County, the median fell 0.5% to $2,442, after rising an average of 4.3% last year and 6.5% in 2016.

(Kyle Kim / Los Angeles Times)

Lower rents would be a shock for many of those living in California. But just because the median rent — the point at which half the apartments are renting for more and half for less — dipped doesn’t mean rents are suddenly falling for tenants. Vacancy remains very low. Data providers other than Zillow do not show a rent decline, but a slowdown is clearly evident in their surveys.

The deceleration is most pronounced for more expensive rents, which is also where most of the new apartments are aimed. But data show slackening in older buildings as well.

The slowdown comes as Californians prepare to vote on a major rent control measure in November. Tenant advocates say the current development boom hasn’t helped low-income tenants much, with some even arguing new luxury housing can make apartments nearby more expensive by luring wealthier people and contributing to gentrification. But Brent Gaisford, director of Abundant Housing L.A., said recent rent data suggest that even new luxury buildings carry relief for lower-income renters, by causing wealthier tenants to move out of older buildings and thus freeing up units for less-well-off households.

“When more units are on the market, landlords have less power,” Gaisford said. “Hopefully we can keep that going.”

In so-called Class A buildings — those that tend to be newer and more luxurious — data from RealPage show the median rent across L.A. County was up 3.1% in the second quarter compared with a year earlier. Rent growth in those higher-end buildings peaked at 6.3% at the end of 2015 and was as low as 1.9% in the fourth quarter of last year.

In lesser-quality Class B buildings, median rent rose 3.3% in the second quarter of this year, compared with a peak of 7.8% in the first quarter of 2016. In Class C buildings, which tend to be the oldest, most rundown properties, rents rose 4.1% in the second quarter after rising as much as 7.4% in the fourth quarter of 2016.

In Orange County, median rents in Class A buildings rose 2.2% in the second quarter, 2.4% in Class B and 2.6% in Class C.

Rent growth in the Bay Area has also tapered off from the sharp increases seen several years ago.

Among those who stand to benefit from the slowdown is Darrell Alfonso, who with his girlfriend moved into a $2,115-a-month, one-bedroom in Palms on the Westside of Los Angeles in 2016. A year later, when their lease came up for renewal at the non-rent-controlled apartment, he expected a sizable increase. Instead, he said they signed up for another year at only $25 more a month, a 1.2% increase. That’s below even the maximum 3% allowed in L.A. rent-control buildings.

“I was a bit surprised,” said Alfonso, a 32-year-old marketing manager, who if he renews again this fall can probably count on not seeing much of an increase.

Mark Hammerschmitt, who is the principal owner of the complex, said he is moderating rents now in response to the competition from new buildings opening nearby on Venice Boulevard and Overland Avenue, as well as in downtown L.A. By holding down increases and adding renovations at the 1980s-era complex such as a resident lounge and freshening up the pool area, he's hoping to limit vacancies.

“We can read the tea leaves,” Hammerschmitt said. “I don’t want my residents leaving.”

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Of course, for the nearly 2 million California renters paying more than half their income on rent and utilities, even a small increase isn’t much relief. Furthermore, the slowdown itself is bifurcated in a way that county-level data masks, according to real estate professionals and tenant advocates.

Gary DeLong, vice president of legislation for the Apartment Assn., California Southern Cities, said that although “stable” neighborhoods are seeing rent increases of 2% to 3% a year, dramatic jumps occur in gentrifying areas where landlords are renovating buildings to cater to an influx of higher-income tenants priced out of other communities.

Take the Westlake and Boyle Heights neighborhoods near downtown. Those lower-income communities are an increasingly attractive location for people who make more but can’t afford downtown.

That means even though lots of new units are opening nearby, there are still plenty of opportunities for landlords to make formerly low-rent buildings pricier. Some tenants in those two neighborhoods report rent increases of hundreds of dollars a month or have simply been given no-fault eviction notices to leave in 60 days.

Luis Herrera, 38, recently started paying around half the income from his IT job for the one-bedroom in Westlake he shares with his father. He said his landlord raised his rent to $1,300, an increase of 24%. “I will have to cut back,” he said.

Economists generally agree the root cause of California’s housing woes is that for decades, too few market-rate homes have been built relative to job and population growth. They have urged a loosening of development restrictions to expand supply across neighborhoods.

One area where it’s relatively easy to build is downtown Los Angeles. Zoning that’s friendly to dense development and a lack of neighborhood push-back have helped make downtown the epicenter of the apartment-building boom.

For years, cranes have dotted the skyline and some of the largest projects are now nearing completion. L.A. companies Jamison Services and Hankey Investment Co., for example, recently started leasing apartments at Circa, their 648-unit twin glass tower project across from Staples Center, where a one-bedroom unit starts at $3,050.

A few blocks away, at Spring and 8th streets, Canadian developer Holland Partner Group is wrapping up work on about 630 units in two towers called the Griffin and the Grace. There, and at its nearly completed 341-unit Alina building on 9th Street, the developer is offering four weeks free to sign a lease.

Other construction hot spots are Koreatown, Warner Center and the Culver City area. In all, CoStar Group Inc. estimates nearly 30,000 new units will hit the market in L.A. County by the end of 2020, boosting supply by about 3.3% and leading to further slowing of rent growth.

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Steve Basham, senior market analyst with CoStar, said rents are unlikely to decline in most neighborhoods unless there’s a recession, but places awash in construction, such as downtown, could see dips. So could certain pricey markets including Santa Monica, where there’s simply not enough people to pay today’s sky-high rent.

“We are coming into the peak of the building boom,” he said.

If voters in November approve the rent-control initiative, Proposition 10, it would repeal the Costa-Hawkins Act, which bars cities from imposing rent control on apartments built after Feb. 1, 1995, and in some cases even before.

The real estate industry has come out strongly against the measure, arguing rent control makes developers less likely to build and will only make rents soar as supply is reduced. Rent control ordinances historically do not cover new construction, but the industry argues that if Costa-Hawkins and its date restrictions go away, some developers won’t build because they’d fear cities would one day cap those rents too.

“The slowdown in rents is Exhibit A for rejecting Prop. 10,” said Steven Maviglio, spokesman for the anti-Proposition 10 campaign.

Tenant advocates scoff at the notion rent controls would limit building and say price caps and eviction protections are needed because a slowdown in rent growth doesn’t do much to help those already in dire straits.

“What does slowing mean? It’s irrelevant,” said Larry Gross, executive director of the Coalition for Economic Survival. “For the plight of tenants, especially those who are being displaced from long-term lower rent buildings, it is still an economic nightmare to find something affordable.”

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