In 1980, the city of Berkeley passed a comprehensive strict rent control ordinance, “strict” because it included vacancy control. Under vacancy control, city-mandated price controls continue to apply even after a voluntary vacancy occurs.
This all changed in 1995 when the Costa-Hawkins Rental Housing Act (AB 1164) became state law, mandating that no local rent control could be passed on properties built after its date of passage.
It also abolished vacancy control. Berkeley took steps to comply. But it didn’t change its own ordinance. Only too ready to dust it off and bring it back to life, Berkeley prepared to automatically revert to the old rules in the event that Costa-Hawkins was repealed.
Opponents of Costa-Hawkins have spared no effort to enable Berkeley and other cities to do just that. Prop. 10 failed on the November 2018 ballot, again in November 2022 (Prop. 21), and a third attempt is in the works. Then there’s SB 466. Tenant activists are nothing if not tenacious.
How Would Vacancy Control Work?
Berkeley’s 1980 rent control law offers an eye- opening glimpse into how vacancy control advocates see it working in practice. Berkeley’s experience serves as a cautionary tale for San Francisco, should it ever be foolish enough and in a position to enact it.
Under Berkeley’s vacancy control program, a base rent for a rental unit is established and is then permitted to increase a small amount each year based on a percentage of CPI, as with San Francisco’s rent control. However, when a unit is voluntarily vacated, the owner can only set the rent for the next tenant based on the most recent rent of the vacating tenant, as dictated by the city. In other words, the rent stays with the unit, not the tenant.
In 2018, anticipating repeal of Costa-Hawkins via Prop. 10, Berkeley’s Rent Board proposed an initiative that would ask voters to establish current rents as the new base rent. Incremental rent increases would start from what the rent was when the tenant moved in; new tenants would simply pick up where the vacating tenant left off. The Rent Board went so far as to say that if Costa-Hawkins were repealed, any rent hikes that resulted from Costa-Hawkins-mandated vacancy decontrol would be erased and the current tenant’s rent would be rolled back to what it
would have been with just normal periodic increases.
San Francisco also tried to pass vacancy control with its 1991 ballot measure M. Measure M would have permitted a “vacancy allowance of 10% to 14%, and could not be imposed more than once in any given 36-month period. So for example, you couldn’t have renters come and go twice a year and have each new rental increased by 10% to 14%.
Economic Impact of Vacancy Control
Since the pandemic, an increasing number of cities throughout the nation have flirted with the idea of vacancy control. But passing vacancy control would be a big mistake. This is what would likely happen:
- The value of many buildings would decrease dramatically overnight. One of the main reasons investors buy rental properties is to add value and overall cash flow by bringing rents up to market rate through renovation and building upgrades. As Mark Ventre of Stepp Commercial, commented in a 2020 article in Multi-Housing News, “since this would no longer exist in a vacancy-controlled market, the main reason to invest would be cash flow rather than appreciation. The initial return would, therefore, have to be higher than it would for value-added opportunities, causing prices to plummet.”
- The opportunity and the incentive to add value would disappear. Why would an owner want to invest in upgrades if there’s no upside?
- Owners of smaller buildings would lose their hard-earned nest eggs. Large operators and institutions whose investors include pension funds, endowments, foundations, insurance companies, and trusts would stand to lose billions. Eighty-seven million Americans who own stock in REITs would endure losses, foreclosures would rise, and cities would lose billions in income and property tax revenue.
- With no financial incentive to maintain their rental properties, neighborhoods would eventually become depressed, home values would decrease, retail would flee and urban blight would be the result.
Mark Ventre goes on to say: “The intent of vacancy control is so that low-income earners can afford to live in markets where they would have otherwise been priced out.” But is that what would really happen? The more likely outcome would be that tenants with high-paying jobs and great credit would be the ones awarded the unit. After all, why would a landlord want to rent to someone with poor credit who might not be able to pay the rent?
“It turns out vacancy control would end up having decidedly the opposite effect of its original intent. There are ultimately no winners in this game. Unfortunately, vacancy control is being sold to the public as the answer to the affordability crisis. Let’s hope voters see through this strategy.”
Reprinted with permission of the Small Property Owners of San Francisco Institute (SPOSFI) News. For more information on becoming a member of SPOSFI or to send a tax-deductible donation, please visit their website at www.smallprop.org or call (415) 647-2419.