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2024 Election Impact on CRE

Posted In — Market Research | Trend Article

From housing and warehousing to landlords and leasing, new caps, controls, and ballot measures up for vote could significantly change the CRE landscape.

Elections have consequences, and this year’s vote will be no exception for the CRE industry. Voting outcomes will shape important policy matters that impact this high-stakes sector beyond 2024. Brokers at Kidder Mathews, the largest fully independent commercial real estate firm in the Western U.S., weigh in on some of the issues that are on future ballots.

Housing on the Ballot

Most agree that housing affordability is a major concern, with the nation facing an estimated shortage of 4.5 million homes. This election, several jurisdictions will put forward measures aimed at addressing this issue.

California’s Proposition 33 (the “Justice for Renters” act) would allow local governments to expand rent control, giving cities the right to undo vacancy decontrol. Many property owners and investors have long argued that rent control inhibits new supply and hinders property upgrades. “This would significantly impact property values, as landlords would be unable to raise rents on vacant units to market rate,” according to David Evans, Kidder Mathews’ senior associate in Los Angeles.

“If I were president for a day,” Evans adds, “I would require any state or local municipality receiving federal funds for housing to remove rent caps for owners who renovate or otherwise improve their existing multifamily units.”

In Los Angeles, Executive Directive 1, which expedites approvals of affordable housing projects, has boosted much-needed volume. Yet, project scale and other building concerns have led to stricter limits from the mayor’s office, prompting familiar objection from commercial real estate professionals.

“The proposed changes to ED1 that would lower the max buildable units and potentially require developers to pay builders prevailing wage would disincentivize new residential development,” Evans says.

In Seattle, Initiative 137 would fund affordable “social” housing development through a 5% marginal tax on employers paying workers more than $1 million annually. If passed in February 2025, this could generate over $50 million annually for Seattle’s Social Housing Public Development Authority. “Seattle should not discourage large employers with high compensation packages from locating/remaining here,” says Jeff Huntington, first VP and shareholder at Kidder Mathews. “The city needs to do more to attract/retain those companies, not push them away.”

In 2023, high housing costs spurred Oregon to be the country’s third most expensive place to live. “There need to be incentives for developers to build more affordable housing, not minimums and in-lieu fees that never make it back to helping low-income individuals efficiently or effectively,” says Kevin Joshi, Kidder Mathews SVP and shareholder in Portland.

California Commercial Concerns

There are several ballot measures, as well as several bills recently signed into law, in California that will impact the commercial real estate landscape — AB 98, SB 1103, and AB 2904, and ballot measures Prop 33 and Prop 34. Viewed by many in the CRE industry as an anti-warehousing bill, California AB 98 was recently signed by Governor Newsom. It places more restrictions on new and expanded logistics development, including replacing any homes removed for development at a 2:1 ratio, not allowing trucks to drive on any streets that would be considered residential, and requiring a buffer of 300 to 500 feet of any “sensitive receptors.” The bill was signed with limited input from the commercial real estate industry which had previously expressed concerns about earlier versions of the legislation.

“In my opinion, AB 98 will have a significant negative impact on industrial CRE in California,” says Eric Paulsen, regional president for Kidder Mathews. “Not only will the added financial burdens on the supply chain ultimately hurt consumers — the very group these policies aim to help, but by limiting future supply and growing demand, rents will likely continue to climb and ultimately result in increased consumer costs.”

Another bill Governor Newsom recently signed into law, SB 1103, could disrupt commercial leasing, impacting both landlords and tenants. Property owners are now required to translate leases or purchase agreements into the tenant’s/buyer’s primary language. This could increase costs and create risks, as tenants may cancel agreements due to translation disputes, potentially making these transactions more risky, more expensive, and therefore less desirable. In addition, the bill could make it difficult to recoup unforeseen expenses such as emergency repairs and insurance premium increases.

On a more positive note, Newsom signed into law AB 2904, the first bill proposed and sponsored by NAIOP, a national commercial real estate development organization, which extends the notice period for zoning changes from 10 to at least 60 days. The new law will allow property owners more time to prepare for pending revisions.

In addition to the legislative changes, voters will consider Prop 33 and Prop 34 on the ballot. Prop 33 seeks to repeal the Costa Hawkins Act, which would allow local jurisdictions to impose stricter rent control measures than those mandated at the state level. Prop 34 introduces new requirements on how certain healthcare entities must allocate revenue from federal drug discount programs, requiring that a substantial portion of earnings be spent directly on patient care.

Contact

BRIAN HATCHER
President & COO
brian.hatcher@kidder.com
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