Commercial real estate is entering a new phase, one shaped not only by market fundamentals, but by policy and regulation. In states such as California, Washington, Oregon, and Arizona, a growing volume of legislative and regulatory activity is directly influencing development timelines, operating costs, and investment decisions for the CRE industry.
For owners, investors, and occupiers, the takeaway is clear: regulatory risk is no longer a secondary consideration. It is a central variable shaping development timelines, underwriting assumptions, and long-term investment strategy.
Zoning Shifts Are Redefining the Development Pipeline
Recent zoning and land-use changes are having immediate, and often unexpected, impacts on development feasibility across the region.
In Washington State, evolving state housing mandates are dramatically altering land use potential. Kidder Mathews EVP Amy Harding, JD, points to a recent project in Gig Harbor where zoning allowed 32 residential units per acre on a parcel previously limited to industrial uses. What was initially planned as a partial self-storage development quickly transformed into a multifamily opportunity. As Harding describes it, the result was “a substantial increase in the value of the land,” with the entire parcel now under contract to a developer planning more than 200 units.
At the same time, entitlement timelines are lengthening in markets that were once considered highly predictable. In Arizona, Kidder Mathews SVP Brian Rosella reports a meaningful shift over the past decade. “There’s increasing opposition to development, and not just the obvious projects,” he explains. “We’re even starting to see opposition from elected officials on projects that ‘make sense.’”
Rosella attributes part of this shift to heightened public visibility and pressure during election cycles. The downstream effect is a more complex and prolonged approval process. “There’s been an increase in the rounds of comments from planning staffs, cities not adhering to their own deadlines, and a lack of experienced planners,” he says. “Together, these factors are making the process slower and more complex.”
For developers, the message is nuanced: zoning changes can unlock significant upside, but entitlement risk is rising and must be carefully managed.
Regulation Is Driving Market Uncertainty
Beyond zoning, broader regulatory activity is introducing new layers of uncertainty, particularly in California.
Kidder Mathews COO Eric Paulsen highlights the scale and pace of change. “One of the most significant challenges in California is the volume of legislation,” he says. “Each session introduces over 2,000 new bills with a wide range of proposals that directly impact commercial real estate.”
Among the most closely watched proposals are those that would expand the regulatory reach of environmental agencies. These measures could hold not only direct polluters accountable, but also “indirect sources” such as trucks and vans operating at warehouses and logistics facilities, potentially introducing extensive new compliance costs and operational hurdles.
For investors, the volume and pace of regulatory change are contributing to a more measured approach to capital deployment. Paulsen notes that industry organizations, including NAIOP and the California Business Properties Association, are actively working to help policymakers better understand the economic role of commercial real estate and how impacts to the supply chain eventually become a consumer tax.
Even with increased engagement, regulatory uncertainty remains a defining feature of the current landscape, influencing how and when investment decisions are made.
Rent Regulation Is Reshaping Investment Strategy
Rent control and tenant protection policies continue to influence investor behavior, particularly in the multifamily sector.
In Northern California, Kidder Mathews EVP John Leyvas has observed how proposed rent caps tied to CPI are affecting underwriting assumptions. “At a cap of 65% to 70% of CPI, the cost of operating rental properties will exceed the allowable rent increases,” he explains, noting that expenses such as utilities, insurance, and taxes have historically outpaced inflation given the reduced allowable cap percentages.
In markets with more restrictive rent regulations, investors are adjusting expectations and underwriting more conservatively. Leyvas points to a recent example in Alameda County, where values declined from approximately $375,000 per unit to $315,000 following the implementation of stricter controls. “Many investors are becoming more selective in these markets because the financial fundamentals are more constrained,” he adds, warning that reduced property values can ultimately impact municipal tax revenues and limit funding for public services.
John Wallace, a manufactured housing & RV specialist in Kidder Mathews’ Portland office, notes a similar dynamic playing out in manufactured housing communities following recent rent caps. “We’ve seen a cooling effect on asset pricing, with some existing owners and investors looking to diversify into more landlord-friendly states,” he says. At the same time, Wallace points out that new capital is stepping in, drawn by the relative predictability of statewide policies compared to more localized regulatory frameworks.
One of the most notable shifts is the reallocation of capital into alternative asset classes. In Seattle, Kidder Mathews EVP David Gellner reports a growing number of multifamily investors moving into retail. “We are seeing an influx of longtime apartment owners migrate to the retail investment space,” he says, driven in part by triple-net lease structures that help mitigate operating expense volatility.
Gellner adds that retail is often perceived as a less regulated asset class, making it an attractive option for investors seeking greater stability. Increasingly, these buyers are targeting multi-tenant assets with higher cap rates, reflecting a willingness to take on more active management in exchange for improved returns.
Insurance Is Emerging as a Critical Deal Variable
Another factor gaining prominence in CRE transactions is insurance cost and availability. Across the Western U.S., rising premiums are increasingly influencing deal economics and underwriting assumptions.
Industry professionals consistently report that insurance is entering the conversation earlier in the transaction process, with buyers factoring potential cost volatility into underwriting. In some cases, deals are being repriced or restructured as a result.
Kidder Mathews SVP Austin Kelley provides insight into the multifamily sector in the Tacoma, Washington market. He notes that the insurance market experienced significant disruption in 2023, particularly for older assets, with premiums increasing by 100% to 300% in many cases and some carriers exiting coverage entirely. While conditions have begun to stabilize, pricing remains elevated, with only selective softening depending on asset type, risk profile, and age.
From a transaction standpoint, insurance historically had a de minimis impact but today has become a meaningful deal variable. “Over the past 12 months, we’ve seen multiple transactions involving older vintage product repriced or terminated as higher insurance costs compress NOI and impact buyer underwriting,” Kelley says.
Certain property types continue to face elevated premiums, particularly assets built prior to 1970, properties located in flood zones, and buildings with unreinforced masonry or other seismic-related risk. Loss history and rising replacement costs have also become key drivers in how assets are underwritten today.
In response, brokers and investors are adjusting their approach. “We’ve incorporated estimated insurance costs earlier in the process, often before bringing a deal to market, and are encouraging buyers to engage insurance brokers during the feasibility period,” Kelley adds. “Strong relationships with insurance providers have become essential in today’s environment.”
This shift reflects a broader trend: operating costs—whether driven by regulation, utilities, or insurance—are becoming less predictable and more central to investment decision-making.
Adapting to a More Regulated Environment
In highly regulated markets like Los Angeles, Kidder Mathews SVP and Managing Director Fred Aframian emphasizes that policy risk must be treated as a core underwriting variable. “Regulatory risk isn’t something we treat as a footnote, it’s front and center,” he says. “At this point, it’s just as important as your exit cap or your rent assumptions.”
Aframian advises clients to build flexibility into their models from the outset, accounting for longer entitlement timelines, higher transaction costs, and multiple policy scenarios. Equally important is a hyper-local approach. “You can’t paint Los Angeles with a broad brush,” he explains. “It’s a collection of micro-markets, each with its own regulatory framework, political climate, and approval process.”
He also highlights a common misconception among out-of-market investors: underestimating execution risk. “There’s a tendency to focus on headline numbers without fully understanding how deals actually get done,” he says. “In this market, timing can make or break returns.”
A New Operating Reality
As policy and regulation continue to evolve, they are reshaping the commercial real estate landscape across the Western U.S. Zoning changes are creating both opportunities and delays. Regulatory activity is increasing uncertainty. Rent controls are influencing capital flows. Insurance costs are altering deal structures.
For industry participants, the path forward requires a more proactive and informed approach. Those who effectively incorporate regulatory risk into each stage of the investment lifecycle will be better positioned to protect value and identify opportunity in an increasingly complex environment.
Contact
Gary Baragona, Vice President of Research
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