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Equity Residential expects revenue hit from NY, Calif. rent laws

Equity Residential expects its companywide same-store revenue growth to be roughly 15 to 20 basis points lower in 2020 as a result of new rent regulations in California and New York, the company's CEO said.

The apartment landlord, which has lobbied against increased regulation and criticized new laws on both coasts, will see its revenue growth hurt by roughly 20 basis points in each market in both 2019 and 2020, CEO Mark Parrell said.

In New York, company executives said an expected decline in competing new construction will benefit Equity Residential properties and help to counteract the slimmer gains from rent growth and late fees that will result from the state's newly revised rent laws.

In California, 97 properties, representing 70% of the company's portfolio in the state, are subject to the new regulations beginning in 2020, and the effects will be concentrated in rent growth for lease renewals, executives said. Parrell said the new statewide law has not hurt property markets in California, but has affected the way the company underwrites new property investments there.

In particular, because rent-increase caps begin applying to properties when they are 15 years old, the company is being "a little bit more mindful" about calculating how properties it buys will be valued in the market 10 years in the future, Parrell said. In general, he said, that means adjusting expectations for internal rates of return on affected properties into the high-6% range, down from the mid-7% range.

The company also sold six properties in Berkeley, Calif., in the third quarter, and Parrell said that "the welcome, frankly, that the city puts out" is part of its calculation in determining which properties to hold.

"I'd say we are aware of places where it's more difficult to do business," he said. "And we factor that into our decisions to sell."

Still, Parrell said there are many factors, including strong job growth and relatively low taxes, that make California's multifamily market attractive. While the company does not want to increase its exposure to California, and would consider decreasing it slightly, it primarily is seeking to own newer properties, he added.