Some Thoughts on Four Controversial California Ballot Measures

 Although I haven't lived in California for decades, I remain close to the state through my research efforts and the many friends who live there. Further, because California has historically led the Nation with its legislative approaches, the results of this year's election could very well have nationwide consequences. Below you will find my views on four of the ballot propositions.

Proposition 15 - Vote NO

This proposition would overturn Proposition 13 by stepping the property tax basis for commercial and industrial property to current market values. The measure would raise about $10 billion a year. In the middle of a pandemic recession it hardly makes sense to raise taxes whose burden would especially hit the devastated retail, restaurant and office tenant sectors with a substantial increase in tax pass-throughs. The money raised would go to inflate the state's already bloated public sector bureaucracies. I would feel much better about the measure if its proceeds were used to lower income and sales taxes.

Proposition 16 - Vote NO

This proposition would repeal the 1996 Proposition 209 which eliminated the use of affirmative action in college admissions. Simply put, given the high Asian enrollment at the University of California, the measure would, in effect, be a 21st Century version of the 1882 Chinese Exclusion Act.

Proposition 21 - Vote NO

This proposition would allow local jurisdictions to adopt an extreme form of residential rent control which would allow controlling rents based on the unit, rather than the tenancy. In a time when rents are falling, the measure would actually work to keep rents high because owners would be reluctant to cut rents today in fear that rents could not be increased in the future. Further the measure would place all units more than 15 years old to be covered on a rolling basis, compared to current law which covers only those units build prior to 1995. In a nutshell apartment construction would be reduced and the housing shortage in California would be exacerbated.

Proposition 22 - Vote YES

This proposition would repeal AB-5 that classified Uber, Lyft and Door Dash drivers as employees rather than independent contractors. Since it emergence over a decade ago the the ride hailing platform industry has offered huge convenience for the public and offered income opportunities to hundreds of thousands of contractors. The essence of the platforms requires flexibility for both the contractor and its contractors. By converting contractors to employees, the business model would be stultified at a cost to both the public and the companies. Thus repeal of AB-5 is necessary. 

My Interview with Greystone on the Post-Covid Apartment Outlook

UCLA Economist: Market Outlook Post-Coronavirus

The COVID-19 pandemic, which has touched every corner of the world and impacted every industry throughout the United States, has left an indelible mark on the economy. Greystone spoke with David Shulman, a senior economist with UCLA Anderson Forecast, part of the University’s Anderson School of Management, about his predictions for how COVID-19 may change the commercial real estate landscape.

Q. What is the outlook for CRE in 2020-21? Are there some sectors that will perform better than others?

A. The multifamily sector is better off than property sectors such as retail and hotels. Probably the one sector that may be most impacted is senior housing. The industrial sector is good so far, and for offices there are long-run questions about how businesses will change their configurations or allow more people to work remotely.

The multifamily sector came into the year strong. Rents were going up and most owners were happy campers. The big risk they were facing was regulatory issues such as rent control. The pandemic has exacerbated that with things like the moratorium on evictions New York City’s legislature is considering extending the moratorium for the entire year.

Q. How is the virus and the financial fallout from the shutdown economy expected to impact multifamily owners and managers?

A. In the near term, there will be pressure on apartment owners because of the wave of unemployment. But they will be OK if they are not overleveraged. Rents will be under pressure all year, but the industry was coming into the year in good shape. A one-year setback is not that big a deal because even if rents fall a little now, occupancy should stay strong.

One long-term outcome could be more regulations leaning towards tenants and away from landlords. We won’t see a ‘no evictions’ policy forever, but we’re likely to see it become much more difficult for landlords to evict tenants.

Q. What should multifamily owners do now to position themselves for a return to normal?

A. Apartment owners and managers need to figure out how to do digital marketing to attract new tenants. They also need to be hypersensitive about cleaning their buildings and letting people know they are doing it. The last thing anyone wants is a COVID-19 outbreak in their building, so they need to use special equipment to disinfect everything.

To keep their tenants, landlords need to be proactive about dealing with people. Maybe they can defer the rent or make a deal. It is better to get 50 percent of the rent for four months vs. none, especially if the tenants are unlikely to be able to pay their back rent after a few months.

Q. What lessons from previous crises can help apartment owners and investors?

A. This situation is so different that you really cannot take many lessons from previous crises. The great recession was more of a slow-motion train wreck that lasted for years. This is hitting a wall all at once.

After 9/11, I predicted that big companies would want their headquarters to be in a nondescript office in a suburban office park, but I was 100 percent wrong about that.

One question is where people will choose to live if they can work remotely. They may choose to work from Nashville or somewhere rather than an expensive coastal city.

The other question is whether people will want to move to the suburbs or to a smaller town. The big cities could be perceived as giant petri dishes for this virus. If that is what people are thinking, this could be better for investors in smaller midrise apartments in the suburbs. But that is a question for 2021 or 2022.

Q. Are there differences in expectations for mid-size multifamily owners compared to larger owners?

A. Smaller buildings and smaller investors are likely to be hit harder by unemployment because they may have fewer tenants who can pay rent. They will be especially hard hit if they are overleveraged.

In the higher-end luxury buildings, which tend to be owned by larger investors, most tenants paid their rent in April. The impact of unemployment is much worse on people with lower paying jobs and those are the people more likely to rent in smaller, more affordable buildings.

Q. What should developers anticipate about the availability of capital for investments?

A. There will be capital to invest. We are in a zero-rate world, so if you buy something at five percent, that is good. But the market needs to know what net operating income (NOI) will be in 2021. Once that is known, we will see lots more investment. The longer the economic shutdown goes on, the harder it will be to come back. If things start to return to normal this summer, we will see more investment faster. It may be that investor appetite will be greater for less urban areas and for cities other than gateway cities, but that is still a big unknown.

Greystone link: https://www.greyco.com/insight/ucla-economist-economic-outlook-post-coronavirus/

My Amazon Review of Conor Dougherty's "Golden Gates: Fighting for Housing in America"

Housing Wars

New York Times economics reporter Conor Dougherty has written an important book on the California housing crisis in general and the locus of that crisis in the San Francisco Bay area. Normally when I review books I do so through the lens of an educated reader. In this case, if I am not an expert, I am close to it. From my vantage point of being Senior Economist at the UCLA Anderson Forecast and the UCLA Ziman Center for Real Estate I have looked at reams of data on California housing and before that I ran real estate research at Salomon Brothers. Further I served on Governor Jerry Brown’s first housing task force in 1979. Yes it is a long standing problem and it was there that I met developer Dennis O’Brien who is featured in the Lafayette controversy discussed in the book.

What Dougherty gets right is the need for fundamental zoning reform in California that would allow for substantially increased densification in the major urban areas of the state. He is a full-throated proponent of the legislation offered by California State Senator Scott Wiener as am I. He also understands that there has to be a substantial limitation on the lawsuits filed under the California Environmental Quality Act (CEQA) that can delay projects for years and ultimately stop them altogether. Thus the real enemy of increasing housing supply in California are an elite group of people who I have identified in the past as “enviro-liberals.” In California, a state that is oh so anti-Trump, the enviro-liberals use zoning to accomplish the same thing as what Trump’s Wall is trying to do. What he doesn’t say is that building trade unions use CEQA to force project labor agreements on developers and that California’s prevailing wage laws substantially increase the cost of housing.

Where Dougherty is squishy it is on the topics of rent control and suburban development. On rent control his liberal heart seems to over power is economics head. He uses the pejorative term “rent gouging landlords.”  The problem here is that out-sized rent increases cannot be sustained without market support. It is tenant competition for scarce space that triggers big rent increases thus making rent control counter-productive. I know that all too well as I was the expert witness for the Santa Monica Rent Control Board in case called Baker v. Santa Monica that upheld the constitutionality of Santa Monica’s 1979 rent control law.

With respect to suburban development Dougherty is concerned about the climate impacts of low density housing on the urban periphery. However many people prefer that lifestyle and if one is serious about solving California’s housing problem, part of the solution is suburban housing.

What makes Dougherty’s book a great read is he brings real people into the dialogue. We see Hispanic families being displaced and we see a fighting Catholic nun in Redwood City protecting tenants and putting together donors and financing to buy up apartment buildings to turn them into affordable units. We see a young and very spunky Sonja Trauss creating a YIMBY (Yes in My Backyard) organization in San Francisco called BARF (Bay Area Renters Federation) to advocate for developers to increase housing supply. She reminds me of my much younger self where I was a leader in group that successfully advocated for an affordable housing component in of Santa Monica’s redevelopment projects.

Dougherty has written a very readable and timely book on California’s housing crisis. It should be read by every legislator, county supervisor and city council member in the state and his zoning recommendations be acted upon.

For the full Amazon Review see:https://www.amazon.com/review/RIMCO9JQBR67C/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv 

"The Inflation to Come in Housing, Healthcare and Wages," UCLA Economic Letter, January 2014

 For the past year, U.S. inflation has remained at very low levels. But that is about to change, led by price increases in housing and healthcare, and by modest wage increases. And that will eventually cause the Fed to abandon its zero interest rate policy.

“Rent controlled jurisdictions (i.e. New York, Los Angeles, San Francisco and Washington, D.C.) are over- weighted in housing price indices. As a result, housing inflation will accelerate as controlled rents are marked to market through vacancy decontrol. Furthermore, 2014 will bring with it the eighth year of under-building.”

As a result, the combination of higher housing costs, a modest snap back in health care inflation and moderate wage increases will soon push inflation up from the extraordinarily low level of the past year. Instead of having a very low inflation rate of 1%, we will soon be witnessing a low inflation rate of 2%. The Fed wants this increase and it will get it. The uptick in inflation combined with an improving labor market will cause the Fed to abandon its zero interest rate policy in early 2015.




For the full article go to the following URLs:
http://www.anderson.ucla.edu/centers/ucla-ziman-center-for-real-estate/research-and-faculty/ucla-economic-letter

or

 http://www.anderson.ucla.edu/Documents/areas/ctr/ziman/UCLA_Economic_Letter_Shulman_01-16-14.pdf