State and Local Regulation Is the Biggest Uncertainty in 2021
While there is a lot of hope for improvement and recovery in 2021, uncertainty is still rampant through the industry. While the new Presidential administration and the ongoing pandemic are giving investor’s pause, varied local and government responses to pandemic are the biggest uncertainty investors are facing today.
“Likely biggest uncertainties and challenges facing commercial real estate in Southern California come from state and local governments.,” Tim Jemal, CEO, NAIOP SoCal, tells GlobeSt.com. “Eviction moratoriums, potential tax increases by cities to offset declines in sales tax revenues, opposition to needed in-fill warehouse space in CBDs and misplaced hostility to commercial real estate are matters of substantial concern.”
In Southern California, the South Coast Air Quality Management District’s new indirect source air quality rule is a primary example, according to Jemal. The rule will regulate and tax warehouses, and Jemal says that it could put upward pressure on retail prices and consumer goods. “This rule will be taken up in April by the SCAQMD Board and require warehouse owners and operators to either reduce truck emissions or pay substantial fees to SCAQMD,” he says. “The rule would impose additional, permanent costs on warehouses of approximately $.90 per square foot, totaling close to $1 billion annually. Most warehouses will end up paying the fee because it will not be feasible or possible to comply with the regulation mandates.”
Unfortunately, warehouses have few options to mitigate these costs. “The vast majority of warehouses have no control over what type of trucks are brought in—add to that the dearth of electric trucks and it’s infeasible to comply,” says Jemal. “If the board passes the rule it will result in a massive tax on warehouses with no clear air quality benefit. Passage of this rule will create a lot of uncertainly while negatively impacting the warehouse industry, all associated jobs in Southern California and quality of life for residents.”
While investors may be the most concerned about local regulatory hurdles, the pandemic continues to be a significant challenge. “The most obvious uncertainty is what continuing impact COVID-19 will have on the economy, commercial real estate and personal behaviors. Administering multiple types of vaccinations is clearly very important,” says Jemal.
In addition, many investors are concerned about the long-term impact of the new administration, which could result in changes to taxes or the 1031 exchange program. “With Joe Biden now president, along with narrow Democratic Senate and House majorities, there is uncertainty on whether Washington will raise taxes on higher income individuals and corporations,” says Jemal. “The popular 1031 exchange program could be at risk and the federal government could demand greater energy efficiency requirements in commercial buildings.