Multifamily Memo: What LA's Latest RSO Changes Mean for Multifamily Investors

What Comes Next for LA Multifamily Investors After the City Council’s RSO Vote?

The November 12th City Council vote is yet another reminder of how complex it has become to operate multifamily assets in Los Angeles. Capping annual rent increases at 90% of CPI makes little economic sense when core operating expenses—property taxes, utilities, insurance—continue rising regardless of inflation. Expenses such as insurance and sewer fees move entirely independent of CPI, so tying allowable rent increases to inflation creates a structural mismatch that owners cannot realistically absorb.

Who Is Most Exposed? Master-Metered Buildings

The product type with the most to lose is master-metered buildings—those with a single meter for gas and/or electricity. These assets were already difficult to operate as LADWP and SoCal Gas have pushed through rate increases far above inflation. Removing the additional 1–2% rental upside that previously helped offset utility inflation makes the risk even more unattractive.

Based on early buyer reactions, investors are now pricing an additional ~50 basis points of cap rate to compensate for this risk. Master-metered assets in Hollywood and Koreatown traded around 6.7% caps in 2025. With a potential 50-bps expansion, values in this category could see meaningful downward pressure beginning in 2026 Q1, assuming the final ordinance mirrors the proposal.

The rent-cap language must still be drafted by the City Attorney before the City Council’s final vote, but the market is already adjusting.

A “Win” Compared to 60% of CPI—But Still a Long-Term Challenge

Some investors view the 90% CPI outcome as a “win,” especially compared to the original 60% CPI proposal. But the bigger truth is this: LA multifamily owners have endured new regulations every single year since 2019, while most of the country deals with minimal rent control or none at all.

These cumulative regulatory layers explain why LA no longer commands the lowest cap rates in the nation. Until 2023, LA cap rates routinely sat below those of most major metros. Today, investors require a risk discount to continue doing business here.

Nationally, through 2025 Q3, the average multifamily cap rate sits at 5.63%, roughly on par with LA’s 5.6% average. But once RSO assets are removed, LA’s non-RSO/AB1482 assets average 5.3%.

My view: The cap-rate spread between RSO and AB1482 buildings will widen to at least 75 bps by 2026 Q4.

Why 1.5%–2% Allowable Rent Growth Doesn’t Cover Real Costs

Investors have grown accustomed to 3% annual rent increases under RSO, which many view as the minimum needed to operate sustainably. Under the new proposed formula, in years where inflation is low (around 2%), allowable increases could fall to 1.5%–2%—not enough to keep up with:

• Property taxes, rising at a minimum of 2% annually

• Utilities, which rise independent of CPI

• Insurance, which is up 200%+ and still climbing

  
  

Example: A Building With $100,000 Gross Income

• Starting gross income: $100,000

• Expense ratio: 40% → NOI = $60,000

• Assume: 2% rent growth, 3% expense growth, and no turnover

• After 10 years: NOI = $68,143

  
  

This represents minimal NOI growth over a decade—i.e., significant margin compression unless units turn and achieve organic market rents.

Any Silver Lining in the RSO Vote?

While ULA has already slowed development starts across Los Angeles, the combination of minimal rent growth and increasingly limited RSO allowable increases delivers an additional blow to new-construction feasibility. Rents have softened across the City, with units sitting on the market far longer than a year ago. Many Class B owners report roughly 30-day lease-up periods, while Class A buildings are now trending closer to 60 days.

Developers are already navigating high interest rates, ULA, and elevated construction costs; adding the likelihood that today’s new construction will be RSO—or will become RSO in the future—further removes the incentive to build market-rate housing.

Over time, these policies will push demand to outpace supply, ultimately restoring positive rent growth. National data makes this pattern obvious: in cities that welcome development and ease regulatory burdens, rents fall as new supply hits the market—currently evidenced in multiple Sunbelt metros experiencing 10%+ annual rent declines. By contrast, Southern California is the only major U.S. multifamily market seeing flat to negative rent growth without a surge in new deliveries, underscoring how much local policy, not supply, is driving the stagnation.

With All This New Regulation, Why Still Buy in LA?

Despite the policy headwinds, the macro environment is shifting in ways that favor LA multifamily. Many lenders are quoting in the mid-to-high 5% range, and the Fed’s dot plot signals another ~50 basis points of cuts over the next 12 months. We expect positive leverage to persist, as cap rates are unlikely to compress soon. By 2026, investors may see some of the strongest initial cash-on-cash returns in years—especially when paired with bonus-depreciation opportunities.

LA still offers a lifestyle and job base that cannot be replicated in other markets, supporting long-term rental demand. The value-add ADU model is also proving highly effective in the right submarkets, particularly walkable neighborhoods where investors are achieving near double-digit returns

.

From my last two years of closings, around 25% of buyers are either underwriting at least one ADU or are already in the process of building them.

How Do LA’s Fundamentals Look Right Now?

Employment growth is modest at 0.3%, with 33,500 net new jobs added this year. Average advertised rents held flat at $2,646, matching the national trend. But performance varies significantly: Inglewood (+10.2%) and Silver Lake (+10%) posted strong rent gains, while Hollywood and parts of the North San Fernando Valley saw ~6% declines.

Developers delivered 9,168 units in the first nine months of the year, with 12,100 units expected for the full year and 9,000 more in 2026—totaling just 1.8% inventory growth, very low by national standards for a major market.

Despite the shaky local economy, LA’s limited pipeline of true market-rate housing should support rent growth in the coming years. If interest rates ease as expected in 2026, the combination of healthier rents and lower financing costs should help multifamily transaction volume begin to normalize as early as next year.