Los Angeles has enacted a 4% cap on rent increases for its vast stock of rent-stabilized apartments, effective February 2025. This move directly impacts about 650,000 units under the city’s Rent Stabilization Ordinance (RSO), setting a clear divergence from market-rate rent trends. The policy highlights the ongoing tug-of-war between affordability measures and asset-level income growth, with far-reaching consequences for underwriting, capital allocation, and market segmentation.

The new 4% cap establishes a predictable, but firm, limit on annual rent growth for stabilized units through January 2026. According to the LA Housing Department, this applies to over half a million apartments, a critical bulk of the city’s rental housing. By contrast, market-rate multifamily rents climbed 2.5% YoY in Q3 2025, per CBRE MarketView, underscoring a widening spread between regulated and unregulated assets. For institutional owners, this means revenue planning must now assume capped growth, potentially reducing refinance leverage and limiting interest from certain capital sources. “You have to recalibrate every pro forma,” noted one local asset manager.

The policy’s exclusion of new construction and non-stabilized units introduces a two-speed market for Los Angeles multifamily. Owners of stabilized assets face not only capped income, but also escalating expenses—insurance premiums and utility costs have risen by mid-single digit percentages over the past year (CBRE, Q3 2025). Meanwhile, private capital may pivot toward market-rate acquisitions or repositionings, chasing less regulated yield. On balance, the cap translates to more conservative underwriting for stabilized portfolios, with lenders scrutinizing rent roll composition and DSCR buffers. Owners with mixed portfolios must now model cash flows by regulatory segment.

Tenant advocates point to affordability gains, especially after a three-year rent freeze during the pandemic emergency. However, stabilized owners signal concern: expense growth continues to outpace regulated rent increases, compressing margins. According to CBRE, average LA multifamily operating costs rose 4.2% YoY, exceeding the new rent cap ceiling. If this spread persists, some owners may delay capital expenditures or maintenance, impacting asset quality. In turn, city policymakers face pressure to balance tenant protection with long-term housing stock sustainability. The city’s glass-and-steel towers now face a new calculus—capex discipline as well as rent restraint.

The cap sharpens the distinction between stabilized and market-rate multifamily, with direct transaction consequences. Valuations for stabilized assets may see compressed cap rates and slower bid activity, particularly from leveraged buyers sensitive to NOI caps. Meanwhile, unregulated and newly built assets could see a premium, assuming continued rent flexibility. Brokers report early signs of price segmentation, as capital sources recalibrate underwriting spreads and debt sizing. Should regulatory intervention intensify, more capital may flow to suburban or Sunbelt markets perceived as less restrictive.

If the regulatory environment remains stable, underwriting for Los Angeles stabilized multifamily in 2025 will increasingly hinge on expense management and granular rent roll analysis. Capital sources may demand higher equity cushions or seek alternative strategies, including value-add repositioning outside RSO boundaries. Lenders are likely to tighten scrutiny of stabilized asset cash flows, with loan sizing reflecting the hard 4% cap. Should operating costs outpace rent growth, a renewed focus on expense control and tenant retention will define owner strategy. Ultimately, the balance between regulation and revenue potential will shape capital flows and asset pricing across LA’s bifurcated rental landscape.

A capped ceiling isn’t certainty—it’s a new baseline for discipline and segmentation.