The Context for Rent Regulation
About one million of Los Angeles’ 1.5 million households rent their homes. About 650,000 of those homes are in units covered by the rent-stabilization ordinance (RSO), which is applicable to units constructed before 1979.
Rent increases for units covered by the RSO occur in two ways. First, when a new tenant moves in, rents may be set at market levels because there is no ceiling on the initial rent for a new tenant. During a tenancy, rents may be increased by the permitted annual across-the-board increases.
About half of RSO units turnover within a four-year period, so market-rate rents for new tenants are a central determinant of allowable rent levels and increases in the rent of RSO units. The average rent of tenants who move into RSO units in 2024 is about 50 percent above the average in 2017.
Rent Savings for RSO Tenants
Citywide, the average rent for non-RSO units is 25 percent higher than for RSO units. This is based on comparing all RSO units with all non-RSO units without accounting for the size of units. However, non-RSO units, which are those built after October 1, 1978, are typically larger than RSO units.
Based on a comparison of the rent for RSO and non-RSO units taking into account both the number of bedrooms and the total number of rooms as benchmarks, the average rent paid by RSO renters is 19 percent less than the rent paid by non-RSO renters for units of comparable size.
Returns from Rental Properties
There has been substantial growth in the net operating income of rental units covered by the RSO. Although operating expenses have increased at greater rates than the Consumer Price Index (CPI), net operating income has grown more rapidly than the CPI.
The average market value of rental properties subject to the RSO has doubled over the last ten years, from about $150,000 to $300,000 per unit. The average market value is nearly five times greater than in 2000. The increase in the values over the past decades is an outcome of the combination of increasing net operating income levels and declining mortgage interest rates (which in turn have led to a decline in capitalization rates.)
RSO and Non-RSO Renters Compared
RSO renters differ from non-RSO renters in that they are more frequently single adults or over-crowded. The average income of non-RSO households is 22 percent higher than RSO households. However, both groups of renters have similar levels of rent burden because the average rent in non-RSO units is higher.
Vulnerable Renters
One-fifth of Los Angeles renters have incomes below the federal poverty threshold. Census Bureau data shows that more than half of them spend over 90 percent of their household income for rent. These vulnerable renters live in both RSO and non-RSO units.
Vulnerable renters are more likely to be under 35 years old, live alone, be unemployed, have annual incomes below $20,000, and receive public benefits. The presence of a disability makes the household more likely to be vulnerable, as does being a single parent, having limited English ability, or being African American.
Rent Increases and Homelessness
The most frequent explanation that homeless adults in Los Angeles give for their lack of housing is unemployment and lack of money. There is a direct connection between loss of income and loss of shelter, but these losses do not occur simultaneously. Disconnection from work is a degenerative dynamic – less work, less earnings, less stable living conditions, and further disconnection from work.
Increases in income inequality lead to increases in homelessness because they simultaneously drive up the cost of housing and the percent of low-income renters who cannot afford housing.
There is a high rate of homelessness in Los Angeles primarily because of this interaction between the housing market and the labor market—namely, the high cost of housing and the high rate of working poverty.
Impact of the Covid Pandemic on Landlords
Landlords experienced a sharp increase in non-payment of rent during the Covid pandemic, which they addressed by granting more rent extensions, charging less late fees, deferring maintenance, and listing their properties for sale. During this period, their right to evict tenants for non-payment of rent was substantially curtailed.
Landlords nationwide were least likely to offer adjustments to renters of color for the same level of non-payment of rent.
Rental assistance programs throughout the U.S. were significantly helpful to tenants and, in turn, their landlords, but they did not reach as many tenants as administrators often hoped due to strong resistance from some landlords. However, in Los Angeles, rental assistance was paid directly to tenants whose landlords declined to participate.
Census surveys indicate that approximately 13 percent of renter households in Los Angeles and Orange Counties are currently behind on rent, with an average of 3.1 months of rent unpaid by those households.
Increases in Apartment Operating Costs
In Los Angeles, operating expenses for apartments average about 35 percent of rental income. The balance of rental income after subtracting operating expenses – net operating income – is the return on the investment in the property, which is available to cover debt service and provide cash flow to owners.
Assuming an average monthly rent of $1,600 (the exact average for all RSO units is $1,629), and an average operating expense ratio of 35 percent, monthly operating costs per rental unit average $560.
Rent Increases for Landlords Who Pay for Gas and/or Electricity
Under the RSO, apartment owners who cover either gas or electricity costs are permitted additional annual rent increases of one percent for each of these services.
In the cases of a tenancy of five years, the additional rent increase could be in the range of $75 to $120 for each service provided. This amount exceeds the total cost of the utility service.
The Economic Roundtable recommends that the increases in utility costs that are passed through to renters should not exceed the average actual amount of increases in those costs.
Allowable Annual Rent Adjustments in Other California Cities
Rent stabilization ordinances are currently in effect in 33 California jurisdictions.
Under the annual increase standard in the City of Los Angeles RSO in effect prior to the pandemic, the allowable annual increases were greater than those that are now permitted under a majority of the ordinances.
During the past decade, when the CPI increased by only one or two percent a year, the three percent RSO floor on the annual allowable rent increase was greater than the increase in the CPI.
Consequently, the outcome of the RSO annual increase standard in effect before the pandemic was to compound move-in rents set at market levels under shortage conditions with annual rent increases for tenants after they moved in that exceeded the increase in the CPI in years with low inflation.
The Annual Increase Standard
Under the RSO and most other California rent ordinances, the annual allowable rent increase is tied to the Consumer Price Index All-Items for All Urban Consumers (CPI-U) for the local region.
The BLS also publishes an All-Items Less Shelter Index, which does not incorporate rents in its weighted index. In recent years, increases in the All-Items Index have exceeded the increases in the All-Items Less Shelter Index. We recommend that Los Angeles use the All-Items Less Shelter Index in order to avoid the “circularity” associated with the use of the All-Items Index.
Compliance Issues
Currently, about 69 percent of all RSO units are properly registered in the RSO Rent Registry, leaving 31 percent with unknown rent amounts and dates of last tenant move-in.
This requirement is important because lack of full compliance raises the possibility that there are systematic differences between properly registered units, which provided much of the statistical basis for the analysis in this report, and policy considerations based on this analysis, and units that are not properly registered.
Information about the actual amount of increases in utility costs of apartment owners is essential to inform the public and City Council about the impact of these increases relative to rental income. Repeated efforts by the Economic Roundtable to obtain information from the Los Angeles Department of Water and Power (LADWP) about increases in utility costs were fruitless apart obtaining data on average water costs for apartment buildings.
Annual provision of this very basic cost data to the Housing Department should be required.
Press Coverage
LA could cap rent hikes next year to 2% under new city rent control recommendations
By David Wagner, LAist (November 8, 2024)
Presionan por reforma del control de alquiler en LA
By Jorge Luis Macías, La Opinión (November 3, 2024)
Setting up a fierce debate, city-commissioned report recommends changes that would lower LA rent hikes
By David Wagner, LAist (September 16, 2024)
