This HR&A rent stabilization analysis has done our city a service. Policymakers, landlords and tenants now have an idea about the character of rental housing stock in Beverly Hills and the tenants who inhabit it. However our city still knows little about those who own it. We have had rent stabilization ordinance on the books for four decades yet the city until recently had no tally of rented units and no idea about ownership. This city’s rental unit registry and the HR&A Advisors study has filled in those gaps.
First a bit of background
Beverly Hills never tracked the businesses that provide rental housing. There was no means by which officials could identify problem operators or cross-index problem properties to identify consistent problematic practices. Landlords did kick out longtime tenants and then unlawfully increased the rent for the next guy. And the city could not effectively monitor the practice.
Also, business taxes sometimes went uncollected when scofflaw landlords didn’t register for a business license as the law required. And because the city didn’t systematically check to see which apartment properties were not licensed to do business — because we had no definitive roster or registry of apartment houses — those scofflaws skated for many years on paying any business tax.
The city has now implemented a rental unit registry. Despite howls from landlords — and a landlord lawsuit to tank it — we now have a city database that includes ownership, management, and some limited information about tenancies. Finally the dots can be connected. Except for actual data on Beverly Hills business operations: landlords provided none.
Have a look at the data brief and then consider our Renters Alliance summary and observations.
General characteristics of rental households in Beverly Hills
Beverly Hills is a renters’ city. When we think of Beverly Hills we may picture single-family suburban-style homes and homeowners, but the HR&A study shows that 60% of all households in Beverly Hills rent housing. Half of all renting households reside in multifamily buildings. Of those multifamily dwellers, 90% of households are rent-stabilized. Under city ordinance every property of two units or more falls under Chapter 5 or Chapter 6 and so nearly every tenant in a rental apartment house has some local tenant protections.
Beverly Hills renters are a transient lot. The study found that Beverly Hills rental dwelling units turn over quickly: nearly 8% of all renting households moved over the past two years (tied with Santa Monica) and two-thirds moved sometime since 2010. Only about one-third of households have been renting at their current address for more than eight years. Renters are most transient of residents regardless of whether we live in an apartment or a single-family home.
Beverly Hills renters are among the most ‘rent burdened.’ More than half of all renting households in the city pay more than 30% of their household income in rent. That’s a federal measure used by HUD to gauge how deeply the rent payment cuts into the household budget. Moreover, in Beverly Hills nearly one-third of renting households pay more than 50% of household income in rent which HUD terms ‘severely rent burdened.’ That’s a higher rate than Santa Monica and West Hollywood (cities that have implemented a stronger form of rent control than Beverly Hills) and other comparison cities. If you have priced rental housing in Beverly Hills recently you can attest to the sticker shock!
Recent data show that local households locate to Beverly Hills less frequently than out-of-state and international households move to our city. Compared to other localities, HR&A found that our city had a higher proportion of non-locals moving here in 2016 while a lower proportion of local or regional households were calling Beverly Hills their new home. Moreover, those incoming non-local households, drawn by our quality-of-life or by brand-awareness or whatever, likely will push rents up and keep the rent burden high for half of the rest of us.
Characteristics of Rent Stabilized Housing in Beverly Hills
Drilling down on rent stabilized units we find that the HR&A study makes findings similar to our own analysis of registry data presented by the city this past March. Some points from the HR&A data brief:
- Only 3% of tenancies are Chapter 5 while 97% of tenants are Chapter 6;
- Rents diverge markedly between Chapter 5 tenants ($1,017 on average) and Chapter 6 ($2,427) owing to CPI capped increases for the latter, longer-term tenants;
- Rents average $2,365 across all units but roughly track unit size (studios average $1,389 and 4-bedrooms reach $4,936);
- Only 1% of tenancies benefit from federal Section 8 vouchers (notably there is no subsidized housing in Beverly Hills for non-seniors); and,
- As many as 6.7% of rental units are vacant (as of March 21st registry data).
Rent is High and Rising
Rental market surveys show a steady albeit relatively moderate increase in Beverly Hills rents between 2000 and 2017. Rents overall have increased at an annual rate of 2% over the period which is very much in line with surrounding cities (and LA County). In fact the trend lines move very much in parallel.
Most Beverly Hills tenants have seen moderate annual rent increases over time. The problems are driven by the landlords at the margin. Some took advantage of the market’s failure to increase supply and levyied the maximum 10% allowed increase year after year. Others evidently didn’t raise the maximum. Indeed they didn’t need it to remain profitable according to this data brief: net income on operations averages about 66% of each rent dollar in the region.
Beverly Hills rental apartments overall are more expensive to rent relative to the comparison localities. That is, when rents are averaged! On a per-square-foot basis, though, our rental housing is not nearly as pricey as Santa Monica. Even West Hollywood has surpassed Beverly Hills in price-per-square-foot. Why? Santa Monica and West Hollywood each have produced many more rental units than has Beverly Hills, and newer units are more expensive to rent on a square foot basis. They also tend to be smaller. (Beverly Hills municipal code, by contrast, requires all new units to be absurdly large. Moreover, the every few units that come to market here are mostly condominiums, which is not included in the HR&A analysis.)
Vacancies are running high. The data point on vacancies is significant because the available supply of rental housing is already limited. Every vacancy obviously is an available rental unit that is not inhabited. Now contrast the city’s 6.7% current vacancy rate with the rate reported for our city during the 2012–2016 census period: 3.9%. (The latter figure represents all vacant rental dwelling units including single-family homes.) Why the big gap? Perhaps the relatively high vacancy rate in rent-stabilized units as of March suggests that asking rents are too high? Additionally, landlords may be keeping apartments off the regular rental market for short-term rental (but perhaps reported as vacancies to the registry). Some landlords may ‘warehouse’ units as they await changes in the rent stabilization ordinance or contemplate a condominium conversion. The study draws no conclusion.
Rent-Stabilized Apartment Property Ownership
The HR&A study provides some key information about rental apartment property characteristics. The most significant may be ownership structure.
Nearly three-quarters of all apartment rental properties are owned not by individual mom-and-pop owners/operators but by corporations and limited liability companies. These ownership structures reap significant tax benefits and in many cases suggest sophisticated owners/investors (hardly the mom-and-pops we’ve heard so much about).
Even when we drill down to the 4-unit-and-under buildings, one-third are held by a trust, partnership or an LLC. Landlords want to exempt these so-called mom-and-pop properties but the registry data suggest that ownership has passed from those original individual owners to heirs or other investors.
Extrapolating from HR&A charts we see about twenty 4-unit-and-under properties are actually corporately owned. This is curious! A corporate owner is wholly different from an LLC or a partnership: it is a shareholder-owned, director-operated creature that enjoys the most favorable federal tax treatment. With corporate investors motivated by a very low 21% tax rate (thanks to the Republicans tax law) we should see more corporations snapping up small properties.
Rent-Stabilized Property Sales in Beverly Hills
Property sales illustrate a high level of investor confidence in the rental property market in Beverly Hills. From the data brief:
Despite rent restrictions, Beverly Hills RSO Buildings have historically sold for higher average prices per unit than all apartment buildings in comparative areas…The data suggest that the RSO has not hampered property value growth, and Beverly Hills RSO Buildings have generally sold at higher prices on average than all apartment buildings in nearby cities, which include more unregulated new construction apartment buildings. – HR&A Advisors draft data brief (p. 21)
Sale prices for residential rental real estate has reached an all-time hight. The average price a buyer paid for rental property was $590,000 per unit in 2017, according to CoStar market data – more than 20% higher “per door” (in industry parlance) than for rental property in Santa Monica where the per-square-foot rents are much higher.
Tenants pay for those inflated prices. New investors have told City Council they raise rents after a purchase in order to achieve a positive cash flow. Should an investor be allowed a 10% annual increase simply to make up for an inflated purchase price if the price paid by tenants is sharply higher rents or displacement? The HR&A data brief sheds no light on such dynamics.
Smaller properties turn over much less frequently. The market data show that sales of smaller 3- and 4-unit properties lagged that of medium-sized properties of 5 to 19 units between 2000 and 2018. For example, the smaller properties comprise 23% of the rental housing stock in Beverly Hills but accounted for only 10% of sales (60 total). Over the period, properties of 5–19 units were 90% of all apartment house sales.
The data suggest that these smaller properties are more tightly-held, and that holds real consequences for the rental property market in Beverly Hills where 4-units-and-under properties comprise more than 40% of all rental properties. The study draws no conclusion, but these may be more likely to be owner-occupied or kept within the family as a long-term investment. Perhaps operating inefficiencies make them less appealing to investors. Risk is also greater as any vacancy in a small property is a significant hit to the bottom line.
HR&A prepared the data brief to inform the fall rent stabilization discussion with factual data missing from earlier dialogues and city meetings. City policymakers will benefit from the registry figures and the regional rental housing market picture will provide necessary contact. Tenants will benefit because the data suggest that landlords have been overstating their expenses while landlords may benefit because hard data eschews anecdotal claims about tenant hardship.
Please read the data brief. Renters Alliance provides this narrative summary to make the charts and tables easier to digest and to suggest additional questions. And we have many! We look forward to the opportunity to share them in the upcoming series of community dialogues and the Council rent stabilization study sessions beyond.
- Notably the landlords who cried about their rising expenses refused to provide the data. Landlords who howled about negative margins due to rent stabilization declined to provide figures on their net operating income. In the absence of even actual anonymized data, HR&A used imprecise proxies to estimate expenses and margins in a general fashion. ↩
- However if landlords are successful in persuading City Council to exempt all 4-unit-and-under properties, about 450 properties (including more than 1,100 households) would no longer enjoy the tenant protections of local rent stabilization. That could mean one-quarter of all renters in Beverly Hills could go without city protection from excessive rent hikes and eviction without relocation fees. ↩
- Renter turnover is high overall in Beverly Hills, but turnover of rent stabilized households is most relevant here. As rent-stabilized units turn over, property owners reset the rent to market rate. Regardless of how strict is the rent control, then, turnover narrows the gap between actual rents and market-rate asking rents. The higher the turnover, the closer is the aggregate rent in a property to market rents. That belies landlords’ claim that rent control decimates their rental business. Every unit turnover is a market unit once again! ↩
- Vacancies serve a purpose if a landlord is contemplating taking units off of the rental market: he would pay no relocation fees or have to give advance notice when redeveloping or converting to condominiums. It is simply more practical to slowly empty the building through turnover. The problem is that tenantable units are kept off of the market which pushes overall rents higher because supply is more constrained. ↩