Pandemic rent control? Bay Area landlords lose their pricing power

It took a virus, not political action, to prune the pricing power of California landlords.

The coronavirus has hammered the state economy, and the once rock-solid residential rental market has been especially hard hit. Data from the Consumer Price Index shows us that business limitations designed to slow the pandemic’s spread have dramatically changed consumer spending habits — just as California voters will weigh a rent-control measure Nov. 3.

My trusty spreadsheet looked at three California metro areas tracked by the CPI and found that the pace of rents increases has slowed dramatically this year.

For example, rent hikes in Los Angeles and Orange counties in September dropped by the largest amount since the Great Recession ended. The metro’s cost of renting rose at a 2.6% annual rate in September — the lowest rate since 2014 — vs. 5.6% a year earlier. The last time the region saw a bigger one-year percentage-point drop was 2010.

In San Francisco, Alameda, Marin, Contra Costa, and San Mateo counties, rental costs rose by 2.2% in the year compared with 3.1% a year earlier. The last time rents rose slower, by this measure, was 2011.

And in the Inland Empire, where the CPI has tracked inflation for just two years, rents rose at a 3.6% annual rate vs. 4.7% in September 2019.

The U.S. Bureau of Labor Statistics’ CPI tracks rental costs by polling a wide swath of consumers in various rental arrangements. That differs from many other rent measurements derived from surveys of apartment landlords. These industry indexes suggest similar trends: Property owners’ asking prices are, at best, flat in Southern California and falling in the Bay Area.

Tough business

No matter the math, landlords are finding business difficult these days.

Business lockdowns have hammered the employment market, pushing the state’s unemployment rate to 11.4%. Lower-paying service jobs often held by renters were most affected.

Many tenants can’t pay — and more than a few have simply departed. The Census Bureau’s experimental survey into pandemic fallout shows 12% of California renters have no confidence they can pay October’s rent, or will defer it. Meanwhile, 13% said they fear eviction in the next two months.

A statewide eviction moratorium adds to the market’s complexities. At the same time, record-low mortgage rates have turned some more-fortunate renters into homeowners.

All of these factors have forced landlords to adjust rents for struggling tenants while competing heavily on price to fill a growing inventory of empty units.

Let’s look at how far rent hikes are down, using the CPI’s history. Last year in L.A.-O.C., rents rose 5.5% after averaging 4.6% increases in 2015-2018. In the San Francisco metropolitan area, rents rose 3.8% last year after a 5.9% pace in 2015-18.

Those pre-pandemic rent hikes have fueled the ongoing rent control debate across California and landed Proposition 21 on the November ballot.

The initiative would give California municipalities a greater ability to regulate what local landlords charge. It follows last year’s new law capping California rent hikes annually at 5% plus inflation for tenants in most older properties. The previous year, a proposition similar to Prop. 21 was handily defeated.

Not alone

Let’s also note that landlords are by no means the only local businesses that have lost their pricing power.

There are clear signs of weakness in the broad economy. The CPI tells us that overall L.A.-O.C. inflation was rising at a 1.2% annual pace in September vs. 3% a year earlier. San Francisco’s 1.6% rate in August was down from 2.7% a year earlier and was the lowest for the month since 2010. In the Inland Empire, September’s overall inflation rate was nearly halved to 1.7% from 3.1% a year earlier.

Now, take gasoline. The pandemic’s push to work from home has reduced commuting and slashed demand for fuel. Prices are off 15.7% in a year in L.A.-O.C.; 13.9% in the Inland Empire; and 10.2% in San Francisco.

On the flip side, the era of coronavirus life has also boosted certain consumer costs.

With so many people at home, household energy costs more as demand rose in a hot summer — up 17.2% in the Inland Empire; 8.2% in L.A.-O.C.; and 7.2% in San Francisco.

And ponder what “stay at home” did to grocery prices.

In the Inland Empire, the trend boosted grocery prices 9.3% in a year. Home cooking likely grew with fewer long daily drives to work. Meanwhile, the cost of eating out was only 3.9% higher.

A similar trend was seen in the San Francisco metro area, where grocery prices were up 7.2% in a year vs. 3.6% more for eating out (or takeout).

In L.A.-O.C., however, grocery prices rose 3.2% as eating out got 5.1% more expensive. Perhaps eased restrictions on restaurants lured diners out of the home for meals closer to the coast.

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