Will San Jose’s New Rules Hobble Its Market?

Former Mayor Chuck Reed contends that the city’s restrictive new eviction regulations are discouraging development of badly needed new multifamily inventory.
Chuck Reed

Chuck Reed

California is one of the few states in the United States with rent control policies and now, one of the country’s most expensive real estate markets strengthened its renter rights. San Jose officials approved new measures, including one that makes eviction of a resident possible only if there is a good reason to back up the decision. While renters salute the rule that keeps them from losing their home just because the landlord has found someone willing to pay more, building managers and owners claim that the new regulations will only make things more complicated, especially when dealing with bad residents. Former mayor of San Jose Chuck Reed, now special counsel in Hopkins & Carley’s Real Estate Practice, discussed with Multi-Housing News about the impact of these changes on one of West Coast’s hottest housing markets.

MHN: As a former mayor, how do you see these new measures meant to protect the renter?

Reed: These “just cause” limitations on evictions are the result of rapid rise in rental rates, which are driven by increases in employment and a chronic underproduction of housing. These trends have been the norm in Silicon Valley for decades. In addition, the rental segment of the voting population continues to grow as the housing being built is mostly rental. Owner-occupied housing rates dropped from 62 percent in 2000 to 57 percent in 2015. Property renters vastly outnumber property owners so it is not surprising that city council decisions favor renters. Renters will win those political battles unless property owners are organized and willing to engage early and often.

MHN: How do you think these measures will impact the multifamily market?

Reed: Fewer projects will get built. The housing shortage will continue to grow. The multifamily market is already restrained by government policies that drive up the cost of new housing and empower opponents of new housing. The limitations on evictions will have a negative impact on profits as they reduce property owners’ ability to manage their properties as necessary. Getting through a long and expensive approval process will be just the beginning of the struggle. Trouble-making tenants will have more ways to frustrate evictions and good tenants will have to live with more bad tenants. Property owners will have to get more selective in their renting decisions to try to avoid bad renters that they cannot easily get rid of.

MHN: Should we expect to see a spike in San Jose’s rental rates (since landlords will maybe want to make sure they have a significant income, now that they won’t be able to replace tenants so easily just for the sake of higher rental rates)?

Reed: I don’t think we will see a spike in rates. Rental rates will be driven by market forces for most of the rental housing market, but projects built before 1995 will struggle with eviction limitations on top of the burden of rent control.

MHN: One of the opponents of the new measures said that San Jose needs more housing units and not more regulations. How do you see the multifamily market in San Jose in terms of supply and demand?

Reed: San Jose supplies most of the housing for Silicon Valley workers. Silicon Valley cities have not been producing enough housing for the Silicon Valley work force for decades. Most cities in Silicon Valley are aggressively pursuing and supporting job creation. There is little support to do the same for housing. Most Silicon Valley cities outside of San Jose have far more jobs than housing. It is impossible and fiscally undesirable for San Jose to build enough housing to meet the needs of Silicon Valley workers. Demand for housing far outstrips supply and that gets worse every year, driving up housing costs.

MHN: What can you tell us about the city’s housing market in terms of rent control and rent stabilization? Do such policies apply in San Jose? To what buildings/renters?

Reed: San Jose rent control applies to projects built before 1995. The limitations on evictions applies to all projects.

MHN: What are the current challenges in the city’s multifamily market and how could these be overcome?

Reed: San Jose’s challengers are those of California, generally. More jobs are wanted. More housing is not. State laws empower local opposition, restrict expansion of city boundaries and make infill difficult. Local governments use zoning power and environmental approval power to thwart development and to reduce densities. Existing property owners are happy to see their property values increase. Existing property owners usually don’t want more cars on their streets or more kids in their schools and they have tremendous influence on local governments. Future property owners and future renters have almost no influence on local government decisions.

The State of California could shift the power balance by streamlining the environmental review process and reducing the power to obstruct development. The state could make it easier to expand city boundaries for housing and easier to build infill projects.

Image courtesy of Hopkins & Carley