CAA Quarterly Update: Elections & Pandemics Turn Out to Be a Volatile Mix!
By: Brian Jenkins and Mike Conger
With the summer behind us, and election season going full throttle, our 3rd quarter market update is focused on the impact of the government’s response to COVID-19 and its impact on the Commercial Real Estate market, as well as other electoral issues.
It seems like 2020 has been a long year to say the least, but we are beginning to see signs of transactional life in the Commercial Real Estate market in San Diego which has allowed us to start tracking trends in the Post-COVID marketplace. Our previous insights outlined the “Bull” and “Bear” case for most product types and what we are seeing play out seems to be a healthy mix of both cases. Most occupiers and investors are understandably being much more careful about their decisions and taking longer to move forward on most transactions. Many people are comfortable waiting on the sidelines, due to a large confidence gap between many buyers and sellers of certain assets. While others are starting to take advantage of market conditions, which when combined with lower interest rates, are a very measurable savings/improvement to pre-COVID conditions. San Diego has fared well compared to many major metros in terms of Virus Response and Market Strength. Our ability to conduct business outdoors has and will likely continue to help us, in particular our retail and hospitality/tourism sectors, work through what may be a long winter in other parts of the world. Our large biotech and defense sectors have at the same time helped offset some of the losses in tourism and entertainment making the virus less impactful on overall production. To complicate the chaotic post-COVID market patterns we are seeing is an election year of historic proportions. Generally, election years can lead to some head winds in activity, but 2020 is especially important with critical policy decisions and measures on the ballot that may impact the Commercial Real Estate Market. Below is an outline of some of these for consideration: PPP – The Payroll Protection Program, known as the PPP, was welcomed by many business owners as a lifeline and kept many afloat during government mandated lock downs. But now, many business owners and lenders have been anxiously awaiting new standards from DC on the guidelines for forgiveness of the loans made through the program and additional stimulus. Unfortunately, both sides of the aisle are elevating the political calculations of further governmental support over helping businesses in need on Main St. We are hearing the acronym being repurposed as: Political Policies Pending, Perpetual Political Partisanship, and more. As the election season marches on, this will be one of the many issues to follow – and in terms of immediate, local impact is probably the most important. Hopefully post-election, there will be enough motivation to at least provide clarity for business and property owners on what, if anything will be coming from Washington for support. Prop 15 – Commercial Property Owners and tenants need to pay attention to this one! The measure would split the property tax rolls between residential and commercial properties, reassess eligible commercial properties to current market value and, then, reassess those properties every three years. The ballot initiative would make an exception for properties whose business owners have $3 million or less in holdings in California; these properties would continue to be taxed based on their original purchase price. We believe that BOTH Owners and Tenants of properties with low property tax basis will be affected. The market will obviously drive lease rates, as it always does and owners with a low property tax basis will not enjoy the returns they have been used to. Simultaneously, it will push ongoing property tax increases onto small business going into the future. Timing, enforcement, and the details will all need to be worked out but one thing is for sure: The implications of this bill are significant and wide ranging for California commercial property owners and tenants alike, particularly those that have triple net (NNN) leases. Support: San Diego County Democratic Party, California Teachers Association, SEIU and numerous labor unions Opposed: NAIOP California, BOMA California, California Business Properties Association, Downtown San Diego Partnership, San Diego Building Industry Association, San Diego Regional Chamber of Commerce, San Diego County Prop 21 – Apartment/Multi Family Property Owners need to pay attention to this one. Prop 21 authorizes local jurisdictions to establish rent control measures on properties over 15 years old, eliminating the Costa-Hawkins Act. With limited exemptions (e.g. property owners who own no more than two single family homes) this attempt at managing housing affordability, will impact apartment landlords – both in cash-flow, valuation, and potentially lending also. This is one of many recent bills both locally and statewide promoting different forms of rent control. Unfortunately, in some cases these types of government controls have worked in the opposite way they were intended. Reducing the stock of affordable housing over the long term by removing incentives for developers and landlords to make investments. Since rent control already is a statewide law, the addition of prop 21 would make this a particularly slippery slope for apartment investors over the long term. Support: SD Dem Party Opposed: SD Regional Chamber of Commerce, SD Building Industry Association, Downtown SD Partnership, California Business Roundtable, California Apartment Association, SoCal Rental Housing Association, California NAACP, SD Rep Party City of San Diego Energy Benchmarking deadline HAS ARRIVED – the City of San Diego’s requirement for commercial, mixed use and multi-family properties over 50,000 square feet to report whole building energy consumption is now in effect, commencing September 1, 2020. The City is encouraging all qualifying building owners and/or their managers to make note of the reporting deadline and comply. For more information, please click HERE. The City will also has recorded informational webinars recorded, which you can access by going to the same weblink HERE. This replaces the short-lived statewide energy benchmarking mandate from a few years ago and may be a slippery slope towards more regulation of commercial building energy consumption and efficiency. Despite all that 2020 has challenged us with, we are hopeful that 2021 brings with it a sense of recovery and normalcy as the recovery continues. While liquidity is tougher to achieve in a more challenging market, at CAA we have been able to accomplish great results for our clients with creativity and hard work. If you are considering a sale or refinance, contact us right away. This market is dynamic and changing rapidly. There are many ways to value a building, and from adaptive reuse development projects, SBA financing for owner/users, and there is a lot of capital from traditional investors looking for a home. When positioned well with the right brokerage team in place, we believe the market volatility has created opportunity for many to still achieve their goals. We have built our business on providing quality insight and customer service. This pandemic may pose new challenges for you so we wanted to offer our assistance in any way we can. With that in mind, we would like to remind you that we are available for a free property review, lease analysis, and strategy discussion for anyone interested in getting prepared for any potential challenges that lie ahead.
We would like to remind you that we are available for a free property review, mortgage review, lease analysis, and strategy discussion for anyone interested in getting prepared for any potential challenges that lie ahead.