Bay Area rents are on the uptick. So are there new rules to follow and compliance traps.

The sleeping giant has been awakened again. After steady declines in the Bay Area, rent prices are heating up, and housing providers find themselves in a landlord's market with leverage to raise rents and set favorable terms. San Francisco has made a particularly remarkable rebound, with apartment vacancy set to fall further after hitting an 11-year low. The City is no stranger to collapse and recovery.

We’ve seen this rollercoaster of a “boom and bust” economy many times before. First came the Gold Rush, followed by the Dot-com Bubble, the housing crash in the late 2000s, and the long, dark winter of COVID, when landlords were tasked with providing free housing due to draconian eviction moratoriums. Fast-forward to today, and we are in the midst of another boom driven by the AI industry.

This should be good news for the rental housing providers throughout the Bay Area, but we urge caution and prudence when setting rents. Let’s go through some considerations and potential pitfalls that are top of mind.

Overzealous landlords should be cautious in setting rents too high when there is a vacancy. 

If housing providers have a vacancy, wonderful. Typically, rents can be raised to market rate, but the question we need to ask is, “How long will it take to fill that vacancy?” Better to get cash flowing than to have an advertised rental unit languish on the market for several months.

Moreover, overpriced units have the potential to attract undesirable rental applicants who cannot afford to pay the rent. We are aware of many prospective tenants who cannot survive a rigorous credit screening and background check for other apartments, so they will jump at the opportunity to pay a premium (at least at first) for a unit they can’t afford.

Tragically, bamboozled landlords are all too willing to hand over the keys to someone who hasn’t been properly vetted and doesn’t have the wherewithal to make steady rent payments.

Once a tenancy is established in certain rent-controlled jurisdictions, the nonpaying tenant enjoys an abundance of protections, meaning housing providers can be deprived of months of rental income before the problematic tenant is escorted out through an eviction. The proper selection of a tenant is likely the biggest determinant of landlording success, and we want housing providers to amplify their screening efforts in 2026.

Nor should we want to underprice vacant units and have to take into account the rising costs of operating a rental business. 

The topic of inflation is a political hot potato nowadays. There may be an argument that the price of gasoline, the cost of what is laid out on the Thanksgiving table this year, and other products consumed by urban households may be on a downward trend. Yet the Consumer Price Index (CPI) for shelter is based on the cost of renting a home and does not adequately reflect the owner’s costs for operating a rental business.

An easy example is the skyrocketing insurance premiums rental property owners have to pay in California, assuming they can obtain coverage at all. Landlords who call up plumbers to fix a leak may be in for some sticker shock.

New California laws are poised to further increase costs. 

We have said that every time there is a new law to comply with, there are added administrative costs, but the new requirement for housing providers to provide working stoves and refrigerators may prove to be particularly expensive. Please budget for this new obligation.

In an earlier article that covered AB 628, we said that many housing providers do not fully appreciate the potential costs of providing, replacing, or maintaining refrigerators in good working order. Please budget for this.

As always, housing providers need to take into account the administrative costs attendant to updating leases and staying compliant with the law. For example, leases will have to be updated to reflect changes in security deposit rules.

For larger buildings, leases must be updated to inform tenants of their ability to opt out of landlord-mandated internet, cellular, or bulk billing plans; tenants cannot be forced to pay for a service or speed they don’t need, or pay a provider that they don’t choose. Landlords and property managers should anticipate an increased administrative burden in managing opt-ins and opt-outs, as well as additional complexity in rent billing and record-keeping. Housing providers should also consider any existing contract liabilities under long-term ISP agreements; they may still be liable for the full contract costs, even if unable to recoup expenses from all units due to lackluster participation by the tenants.

In light of a recent court decision that opens the door to legal challenges over technical defects in three-day notices that go beyond what state law expressly requires, housing providers need to take a hard look at the notices they are serving and bring them into compliance.

This list is not exhaustive, but suffice it to say that whenever there is a new regulatory regime foisted upon landlords, there will be untold time, expense, and aggravation to get in good graces. Inexorably, time is money.

Breaking the Code on Rent-Setting Algorithms

Traditionally, we welcome as much information as possible to make smart decisions about our rental business. However, politicians, lawmakers, and tenant activists are wary of the use of algorithmic devices that rely on non-public competitor data to recommend when to keep units vacant or how much rent to charge because it strikes them as price-fixing. This disfavor has been codified into law.

When setting rent prices in 2026, housing providers must be aware of AB 325, a new law that prohibits the use of algorithms when collusion, coordination, or coercion is present. There is some misinformation floating around that there is a blanket ban on using algorithms in rental housing. Not true. The law merely clarifies that longstanding antitrust rules apply when pricing tools are involved and adds a new prohibition on coercing others to adopt a shared pricing tool.

Before using algorithms, ask these key questions:

• What type of data does the tool use?

• How is the data obtained or shared?

• When a service recommends a rent level, is it binding on the landlord?

• How is the tool used in practice?

When Airbnb was born on our home turf of San Francisco, it was the Wild West. We said that eventually, the law would catch up with technology, and sure enough, it did. This is exactly what is happening now as lawmakers try to rein in algorithmic tools that give any scent of landlords having an unfair advantage or that rents are being raised artificially.

~ Daniel Bornstein

We know that services like RealPage and Yardi are used by larger housing providers, and so this new law won't impact the masses of small, mom-and-pop landlords. By all means, housing providers are encouraged to avail themselves of online resources like Rentometer, Craigslist, Zillow, and other platforms for comparable rents, taking into account a host of "intangibles" such as walkability, good views, ease of parking, the community vibe, etc.

On a related note about landlords using technology, a new law (AB 723) requires disclosure of digitally altered images. Effective January 1, 2026, housing providers and real estate professionals must disclose when listing photos have been digitally altered or generated by AI. The ad must clearly note that the image was changed and provide access (like a link) to the original, unedited image.

Raising rents for existing tenants

In every time and era, housing providers need to adhere to limits on how much rent can be raised, and when to impose rent increases. These rules are governed by local rent ordinances or statewide rent control. We are hard-pressed to cover all of them in this venue, but Bornstein Law is always available to assist in ensuring rent increases are compliant with the law.

Improper rent increases may invite additional consequences for housing providers in light of a recent court decision that essentially says that a jury can weigh the evidence and decide an illegal rent increase may be tantamount to receiving stolen property. In 2026, we expect many enterprising tenants' attorneys to argue that a rent increase violates California Penal Code Section 496, entitling the tenant to receive up to three times the amount of their loss in civil courts. We discussed this frightening prospect more in-depth here →

Is the property exempt from statewide rent control? If so, the exemption must be communicated to the tenant. If not, the property may be subject to rent caps and "just cause" eviction protections.

A property may be subject to local rent and eviction controls or statewide rent and eviction controls. Or none at all. However, we put a flaming beacon on properties that are not subject to either. Namely, newly constructed buildings, single-family homes, and condominiums.

As we stated earlier, many owners are sleeping behind the wheel by not informing tenants that they are exempt. Housing providers with properties not covered by AB 1482 should not get a false sense of bravado; they still need to notify tenants of this exemption. If not, the owner may be horribly surprised to learn that they are hamstrung to raise rents above the limits imposed by state law, but it doesn't end there.

The failure to notify tenants that they are exempt from rent control will hinder the ability to sell the tenant-occupied property because any potential buyer in their right mind would run like the wind. The would-be buyer could conceivably grope for a just cause reason to evict under AB 1482 to recover possession, but who wants this time, expense, and aggravation?

Will the rent increase be perceived as being made in bad faith?

We do not want to create the optics that a rent increase is retaliatory when there is an acrimonious rental relationship. The tenant complains about conditions in the rental unit, for example, and then suddenly faces a massive rent hike. Even if the rent increase is legally permissible, a rent increase may raise eyebrows when it immediately follows a dispute.

We also don’t want to raise the rents so exorbitantly that the tenant cannot possibly pay it. Case law suggests that these precipitous spikes in rent amount to a “constructive eviction.” In other words, the rent increase is so high that it is clearly intended to drive a tenant out, rather than for a legitimate business.

What is the value of a good tenant? Would a rent increase that drives out a good tenant come with the risk that the unit languishes on the market for months, or worse yet, attract bad, nonpaying tenants?

A good tenant who religiously pays their rent on time and is an excellent member of the rental community is worth their weight in gold. We have to be judicious about rent increases when there is an exemplary tenant in place. Housing providers who escort a good tenant out of the unit to get extra rent upon unit turnover may find this is counterproductive when the new tenant becomes problematic, in terms of missing rent payments or even creating costly damage to the unit.

What are the economics of raising rent if the tenant declines to pay the rent increase but continues to occupy the unit?

When there is no legal or convenient means to evict a tenant in a building ONLY subject to statewide rent control, owners commonly will raise the rents in the hope that the tenant refuses to pay the new amount and vacates. This orderly transition is by no means guaranteed. If the tenant does not leave after proper notice is given, the landlord will be forced to evict the tenant, which can be a long, drawn-out, and costly process.

Alternatively, the owner and the tenant can have a "meeting of the minds" and engage in a discussion about a tenant buyout agreement whereby the tenant voluntarily agrees to vacate in exchange for compensation. It may be prudent to pay more money to effectuate a vacancy.

Parting thoughts

As you can see, raising rents is a complex subject that is part art and part science. We've said that excellence in landlording and property management boils down to three things: Meticulous bookkeeping, superb communication, and knowledge of the law. These traits will be indispensable as we usher in a New Year.

Bornstein Law can assist housing providers in navigating the legal landscape and, as business people and investors ourselves, help you think smartly and strategically about your rental business.

This topic engenders many questions. Please email daniel@bornstein.law to see what role we can play in your real estate success.