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Essex Property expects little to no impact from Calif. rent cap in 2020

Essex Property Trust Inc. expects California's new rent regulations to have little to no material impact on its business in 2020 and little effect on the way the company underwrites assets.

The new statewide law, which caps rent increases on affected properties at inflation plus 5%, is set to take effect at the start of 2020. On an earnings conference call, President and CEO Mike Schall said Essex, which owns West Coast apartment properties, has a long-standing practice of limiting its lease-renewal rent increases to 10%, a practice he called "relatively consistent" with the new law. Moreover, Schall noted that rents in Essex's portfolio generally are growing by about 3% per year — well under the new cap.

Essex expects construction of competing new properties in the San Francisco Bay Area to hurt its ability to raise rents there over the next two quarters. Executives also noted a wave of new construction in Downtown Los Angeles, which has led landlords in the area to offer up to eight weeks rent-free to new tenants.

Still, Schall acknowledged that many California residents are frustrated by high rents. While that frustration has led housing advocates to push for various forms of new rent regulation, he argued that it would best be solved by policies that encourage new development.

Essex and other multifamily owners, including Equity Residential, have lobbied against efforts to repeal the Costa-Hawkins Rental Housing Act — a move that would enable localities to enact stricter rent control laws. Schall said the real estate industry will continue to fight new attempts to repeal Costa-Hawkins, but noted that the industry did not actively oppose the new rent law scheduled to take effect in 2020, calling it a "balanced" measure that would not discourage new development.

A day earlier, Equity Residential CEO Mark Parrell criticized both Costa-Hawkins repeal and the new law, and he said the new law would change the way his company evaluates new property purchases. For his part, Schall said the new regulations would be unlikely to dampen property valuations because property market players are typically underwriting rent growth that would fall short of the law's cap.