4 Ways Oakland Landlords Benefit from AB1482 & New Development
For several weeks, owners and prospective investors have contacted us to express a range of emotions relating to two of the latest real estate developments: California’s statewide rent control initiative (AB1482) and the estimated 10,000 new units entering Oakland’s rental market. While both claim to address the lack of affordable housing and homelessness, these narratives have incited uneasiness and frustration in some, and excitement for future opportunities in others.
This month, we explore four ways AB1482 and new construction enhance Oakland’s long-term potential, and how existing multifamily investors should rest assure the best is yet to come.
#1: AB1482 LEVELS THE PLAYING FIELD
Multifamily assets in rent-controlled cities like Oakland and Berkeley have long been stymied by tenant-friendly policymaking. From an investment perspective, operating in markets where tenant issues can be “quick-to-escalate, slow-to-defuse” have produced cost-prohibitive effects and higher probabilities of risk.
As years passed and city restrictions intensified, many multifamily investors developed a strong preference for non-restrictive markets like Walnut Creek and Concord. Despite lower, comparative rents, the freedom to annually increase rental rates meant greater potential for operating income and return on investment.
Pre-AB1482, free-markets had a clear economic advantage. FIGURE 1 illustrates a hypothetical, comparative scenario of two units: one in Concord vs. one in Oakland, both generating $1000/month. Both units are significantly under market, with Concord’s market rate at $1800/month, and Oakland’s unit at $2400/month.
With the expiration of a 12-month lease term, the Concord property has the freedom to bring the unit to $1800/month, yielding an additional $800/month or $9600/annually. Comparatively, Oakland’s unit moderately increases at a ceiling of CPI (3%), and creates an additional $30/month or $360/annually. Clearly, the financial implications are grossly substantial.
Figure 1 illustrates the obvious disparity between a free-market in Concord vs. a rent-controlled market in Oakland.
Post AB1482, all previous free-markets across California will be restricted to CPI plus 5%. FIGURE 2 illustrates the economic impact the statewide “anti-rent gouging” law will have on newly rent-controlled markets.
Figure 2 illustrates AB1482’s leveling effect once the restriction goes into effect January 1, 2020.
While Oakland’s policies remain more stringent, AB1482 essentially levels the playing field and significantly minimizes the competitive advantage that has long hurt rent-controlled markets. Going forward, investors will decide which investment trade-off has more upside: the 5% advantage in a lagging submarket vs. investing in a historically proven, developing core market with slightly stricter rent control policies.
#2: ADDITIONAL MARKET-SHARE OPPORTUNITIES
The majority of Oakland’s established landlords will continue to operate “business as usual” long after AB1482 is enacted into law January 1, 2020. Despite years of transacting in one of California’s most stringent markets, these investors have amassed record-breaking returns by capitalizing on Oakland’s population and employment growth.
While most will double-down on their portfolio, a smaller segment of investors will off-load their long-held multifamily assets. With the ever-changing, ever-expanding rent control laws, coupled with the city’s soft-story and sidewalk ordinances, those who reach a tipping point will transition away from multifamily in one of three ways: trade into alternative commercial assets like office and retail; parlay profits into burgeoning, out-of-state markets like Dallas, Las Vegas, Phoenix and Nashville; or take the capital gains hit by down-legging altogether.
We already see these indicators in small but meaningful ways. Earlier this summer, a desirable, lakefront property came to market on Grand Avenue. After ten years of his Lake Merritt investment, the owner decided to strategically off-load his multifamily holdings to expand his triple-net retail portfolio. In early September, immediately after the announcement of AB1482, one of Oakland’s trophy properties in the Rockridge submarket came online – the first time in decades.
Last week, we met an appraiser with Chase Bank who told us about the ownership turnover in San Francisco caused by two primary factors: a lack of necessary resources to fulfill city-imposed upgrades; and the desire to avoid compliance headaches altogether. She believes the same trend will take place in Oakland and East Bay markets, and when they do, investors with significant equity in their properties will be well-positioned to leverage into additional market-share (See September’s blog, 5 Ways to Grow Your Multifamily Portfolio).
#3: OAKLAND SHIFTS FROM AFFORDABILITY TO PREFERENCE
Many landlords are concerned with the volume of development taking place in Downtown Oakland. With construction projects like Lennar’s 17th and Broadway Apartments and MacArthur Commons nearing completion, the new supply of inventory has inevitably created rent stabilization across various Oakland submarkets. From longer lease-up phases, to reduction in rental rates during vacancies, owners of older multifamily properties have experienced these after-effects firsthand over the past 12-18 months.
Short term, we expect this market correction to continue until construction slows. In the meantime, it is important to remember how far Oakland has come over the past decade.
Prior to 2010, it was common for units to sit empty for months, and rent concessions included everything from monthly credits to free Apple products! As technology companies moved into San Francisco and drove up rents, tenants came to Oakland in search of affordability. With the beautification of Lake Merritt, gentrification spilled into other pockets of the city, which in turn drove up demand (and rents!) in areas like Temescal, Mosswood, West Oakland and the Dimond.
Today, Oakland has become one of the most expensive places to live in the nation, with rents and property values reaching historic highs. Long regarded as second-class to San Francisco, Oakland is breaking free of its reputation to become a preferred destination with its own beautiful cityscape. Businesses like Kaiser Permanente are expanding, and CreditKarma and Square have absorbed thousands of square-footage in office space. This is just the beginning.
High-profile office developments like the 28-floor Telegraph Tower are already actively recruiting tenants in anticipation of breaking ground in mid-2020. This building alone will bring 875,000 square-feet of office space to Oakland’s Uptown neighborhood, and is set to have a 420-feet vertical elevation which will make it one of the city’s tallest buildings.
As more companies relocate and establish themselves in Oakland, their high-income-earning employees will demand additional housing, services, restaurants and retail. Broad-based employment gains, business development and population growth will keep Oakland on a steady upward projection.
#4: SAVINGS, SERENITY & SAFETY - THE DIFFERENTIATORS
While a segment of renters will take advantage of the conveniences and experiences of luxury living, a sizeable tenant demographic will continue to prioritize savings, serenity and safety – the three S’s – which differentiate older multifamily properties from the various construction projects across Oakland.
Renters we meet often express their lack of interest in the newer developments for a variety of reasons. First, the price of admission to live in a “smart,” tech-forward apartment is staggering. Units at the ZO Apartments on 17th and Franklin range from $2600/month to $6750/month, while Lennar’s 17th and Broadway Apartments range from $3500/month to $6995/month. Keyless entry, roof-top decks, social activities, cold brew on-tap and pet spas are indeed great draws of luxury living. But at $32,000-$84,000 in rental payments annually, many renters will seek alternative housing that align with short-term and long-term financial goals, even if it means saying goodbye to the shiny new Pelotons.
Second, finding serenity away from the hustle and bustle of downtown is becoming more valuable to renters. Many busy, career-focused professionals purposely seek rentals in quieter neighborhoods where they can decompress and escape the madness. Smaller, multifamily buildings with walkability to shops, restaurants, and outdoor spaces like Lake Merritt or the Morcom rose garden offer a reprieve from urban epicenters and high-rise, residential communities with thousands of residents.
And lastly, safety remains – and will continue to remain – a priority for Oakland renters. While many of these new developments are conveniently located near public transportation and BART lines, being situated in transitional areas means exposure to higher rates of crime, vandalism and public defecation. Alternatively, multifamily properties on the outskirts of Downtown Oakland will provide residents with peace of mind when enjoying the beauty of their neighborhood and returning home at the end of a long day.
FINAL THOUGHTS
As Oakland evolved over the past decade, so too has media coverage on both local and national levels. From the San Francisco Chronicle to the Wall Street Journal, much has been written about Oakland’s gentrification, homelessness, rising rents, new construction and more. While it’s critical to keep abreast of local developments, it’s equally important to avoid being swept away in the hype and hysteria of the media and their stories. Oakland will continue to thrive, and owning multifamily investments in one of the most dynamic markets in the world will continue to be a privilege.
Over the years, our father has encouraged people to “get on the gravy train” - his go-to metaphor whenever anyone asks for real estate advice. Owning real estate provides a financial freedom we all dream of for ourselves and for our families. Your ticket has been punched and your seat is yours. If history is any indication of where our market is headed, there are many reasons to remain optimistic.