Sacramento’s Affordable Housing Crisis

Temperatures were rising at the annual expo of the Rental Housing Association of Sacramento Valley last week, and it had nothing to do with the weather. The hot topic: the looming issue of rent control and its potential local impact.

For the property managers and rental housing owners attending the event, the idea of a local rent control ordinance that effectively freezes apartment rents—allowing only a minimum cost of living increases each year—is extremely unpalatable.

“Our position is that we do not like rent control, but we need to build our way out of this (housing shortage), and that isn’t going to happen,” said Jim Lofgren, executive director of the local RHA. “It’s heartbreaking to see how many people are out on the street.”

Sacramento’s homeless population has skyrocketed in the last several years. The number living on the street unsheltered is up 85 percent, according to Sacramento Steps Forward, a non-profit that works to track and aid the area’s homeless. There are at least 3,665 homeless persons in the county, although that number may be as high as 5,000.

The factors influencing the city’s housing and homeless crisis are many. A booming tech economy in San Francisco and San Jose has pushed some workers as far east as Sacramento to find affordable housing. Meanwhile, Sacramento is experiencing its own renaissance of art and culture, attracting Millennials who want to rent inexpensive apartments. Net population increases within the city and surrounding county areas are increasing current demand at greater rates than historical levels.

As a result of all of the above, rents are on the rise. According to Yardi Matrix, in April 2017 Sacramento rents had jumped 9 percent year-over-year, with that bump expected to stay consistent through the end of 2017.

“A lot of the housing units that we would have relied upon traditionally to end a period of homelessness—we can’t. They just aren’t there,” said Ben Avey, director of public affairs for Sacramento Steps Forward. “While it is wonderful that Sacramento is a hot housing and rental market, a lot of what used to be considered affordable housing is no longer naturally affordable. Especially for people who are the most vulnerable and trying to use housing vouchers.”

One has only to drive around the city to see what Avey is talking about. Homeless people are everywhere—especially along the banks of the Sacramento and American rivers, where encampments and tent cities are easily visible.

“If we aren’t more aggressive about trying to solve this problem, that 85 percent is going to be a 200 percent increase. Beyond a certain tipping point, we are going to get to a point where we can’t turn it back,” Sacramento Mayor Darrell Steinberg said at a special luncheon for the RHA board and local property owners. An opponent of rent control, Steinberg laid out his view on how city officials and property owners need to work together to address the lack of housing, moving as expediently as possible.

Property owners’ perspective

For the real estate executives in attendance, the idea of a successful Sacramento rent control ballot measure is a lot like the police showing up to shut down the best house party you’ve ever thrown.

“The one thing I find very frustrating is the lack of respect we receive as an industry,” Lofgren admitted from the podium. “When I think about all the jobs that are associated with multifamily, I get really frustrated that we are referred to as a bunch of greedy landlords and not as a thriving industry.”

Mike Force, an owner and manager of area apartments, operates many Class B and C communities for third-party owners who got into the real estate business looking for dependable returns.

“Owners have to get some return on the property. For a lot of my owners, these are their retirement funds. If you cap the rents, the expenses have to go down,” Force opined. That’s likely to mean less maintenance and renovations on an already aging apartment inventory. The vast majority of apartments for rent in Sacramento were constructed before 1995.

Cynthia Wray, senior director of acquisitions for FPI Management, said she’s seen buyers turn and run if the topic of rent control even comes up.

“If you are tying the hands of the people who own the apartment buildings and they can’t raise rents, why would they want to buy real estate?” she asked. “It’s still business; it’s still capitalism. Why would anybody buy anything if they aren’t going to make any money?”

Property owners maintain that the way to solve the housing shortage is to loosen building regulations and associated fees.

“In California, we need to build 180,000 units of housing a year just to maintain a 5 percent apartment vacancy rate.  But we’re only delivering about 80,000 units. So we’re going in the hole every year 100,000 units,” said Wray.

According to Yardi Matrix, there are 1,500 apartment units under development in Sacramento, with 10,000 more in the planning pipeline. But new construction in the city has been heavily weighted toward Class A buildings.

“It’s not possible to build affordable housing without tax credits. There are too many fees; it just doesn’t pencil out,” said Force. “That’s why there are very few non-Class A buildings built.”

A rent control analysis conducted by Colliers, and presented at the RHA event, estimates that if rent control were to be instituted, the value of multifamily real estate in the city would deteriorate by as much as $4.2 billion over a seven-year period due to declining revenue and ROI potential.

Preparing for a challenge

Rent control would be most likely to land on voters’ ballots in the 2018 or 2020 general elections, so there’s no time to lose if the RHA and its members plan to beat it back. Lofgren estimated that a political campaign could run upwards of $1 million. The current focus is on informing property owners what may lie ahead.

“It’s about education,” said Julie Brawn-Whitesides, a Northern California native and executive director of property management for the ConAm Group. “You have to talk to owners, developers and residents about coming together and having one voice when we talk to the government. When we’re serving our residents, let’s have a conversation. Maybe it’s not always about the work order.”

While some executives in attendance at the RHA event said they weren’t quite sure where the Mayor would fall on the issue, Steinberg clearly stated that he does not believe rent control is the solution to Sacramento’s housing crisis.

“I do not favor rent control, and I believe the problem is primarily one of inadequate supply,” Steinberg said, citing the “astronomical cost” of subsidizing affordable housing. “We have to bring down that $170,000 per unit subsidized cost.”

The mayor’s administration has worked to combat the burgeoning homeless issue in Sacramento head on. With the winter months fast encroaching, new temporary and permanent shelters in the north part of the city were recently proposed. Community HousingWorks, a San Diego affordable housing developer, is also putting forth plans for 150 new low-income apartments next door to the permanent shelter.

But despite that progress, housing those who are ready to enter temporary or permanent residences remains the greatest challenge. Steinberg appealed to the property owners in the audience to do what they can to accommodate residents using housing vouchers.

“We need your active help and engagement to ensure that the available 2,000 vouchers actually work to land people in appropriate rental units in the city and county of Sacramento,” Steinberg said. “We need you reengage with the program.”

With vacancy rates across the city as low as 1 to 2 percent in most portfolios, it’s a tough sell.