RENT Magazine Q4 '21

Taxation is only part of the story. California is ranked near the bottom in the United States for business climate. 8 Not including counties and cities, the state lists 149 types of businesses for licensing. 9 As of 2020, California has more regulatory restrictions—395,608—than three average states combined. 10 Employers in industries ranging from car manufacturing to film production have fled the state in recent years for less hostile territory. Undeterred, in 2018 California was the first state to impose stringent European standards on websites, 11 and in 2019 it was the second state to institute statewide rent control on residential landlords. This law includes the infamous “just cause” provision, which requires owners to make a legal case for evicting any tenant after 12 months of occupancy, regardless of whether a lease is in place. 12 HOPE SPRINGS ETERNAL But things are not all bad for California’s real estate investors. Regulatory and environmental restrictions, as well as labor and material shortages, make new construction more difficult and costly—which can mitigate the threat of new competing housing units. On the jobs front, the California Employment Development Department predicts strong growth over the next decade among software developers, personal care aides and other health care workers. 13 Even if certain categories of private-sector job growth remain flat, state and local government payrolls inevitably expand. And people always will be drawn to California’s weather, despite alarming increases in wildfires and droughts. Especially in the Silicon

Valley, many wealthy business owners will continue to tolerate high costs and earthquake risks to draw from a deep pool of educated workers and avoid the rough winters or hurricanes in other parts of the country. COVID “bounce-back” statistics in California have given rental housing owners some cause for relief. In major SoCal markets like Los Angeles, San Diego and especially Orange County, the supply-demand imbalance in favor of landlords is returning to pre-pandemic levels. Up north, East Bay counties have benefited from the dramatic exodus of younger renters from San Francisco. 14 Sacramento’s high concentration of still-employed public workers, along with an otherwise diverse economy and lower living costs, have contributed to record rent increases. 15 Perhaps more importantly, rental housing valuations in California seem to reflect the anticipation of future appreciation more than revenue growth. This positive bias helps explain why sellers—particularly of single family rental properties—are experiencing a hot market. In the face of incontrovertible economic and demographic trends, some folks nevertheless believe that California real estate can only ever go up, up, up. Such irrational exuberance may sustain property values long beyond a period that conventional underwriting fundamentals may otherwise support. As in the stock market, betting solely on the optimism of future buyers can be highly profitable but inherently risky.

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