Predicting what will happen in 2019 is very complicated. The most comfortable thing to predict is that we will witness a lot of dramatic change. It’s almost certain that we’ll experience an overall economic slowdown that will affect real estate. We believe the following broad trends will challenge all of us in Southern California: homeowners, contractors, architects, designers, real estate brokers, real estate investors and all other real estate professionals:
Costs will rise and shortages of construction labor will continue:
The rebuilding of homes lost in the Thomas and Woolsey fires will begin in earnest in the 3rdand 4thquarters of 2019. The impact of this on the labor market is not widely recognized. In 2018, total remodeling expenditures in LA and Ventura Counties, adjusted for CPI, was 6.8 Billion. The damage caused by the Thomas and Woolsey fires is estimated to be over $5 Billion. There are simply not enough contractors in Southern California to accommodate all of this activity. While construction costs have risen 5% last year, we anticipate even higher increases in the 2ndhalf of the year. Homeowners not affected by the fires should start their projects in the first half of 2019.
PropTech will accelerate
Technology will tackle the real estate market with accelerated speed. Venture capital and tech funds have invested over $5.2 billion in 2018, and investment in real estate technology will continue to boom.In 2019 we will see new innovation in home energy management, security and predictive maintenance. Artificial intelligence will study individual preferences and habits, such as climate comfort, lighting, shower temperature and more. New platforms for home selling will continue toproliferate, attempting to disrupt how real estate sale, finance and insurance transactions will work in the future. New tools in 3-D printing and 3-D modeling, modularization, robotics and machine learning will affect the efficiency and quality of design, scheduling, construction management and cost effectiveness. New multi-family housing will see a lot more of co-living units and smart automated parking garages. Redevelopment of underutilized parking and irrelevant retail will offer new development opportunities.
Opportunity Zones will offer real opportunities
While Qualified Opportunities Zones were part of the 2017 Tax Reform Law, the proposed regulations were only published in October of 2018 and will become effective in mid-January 2019. This provision was passed with bi-partisan support and promised to unshackle over $6.1 Trillion (with a “T”) of unrealized capital gains. Over $10 Billion is currently being raised around the country, but the best fund sponsors to take advantage of this opportunity will be savvy locals with construction capabilities, who can secure the properties, obtain permits and start construction or renovation fast. We think that the law might be changed in a couple of years, so the time to align with the right partners is in the first quarter of 2019.
Renewed sustainability focus
In the wake of fires and continuous climate change, there will be a renewed focus on sustainability in the building and construction industries. As calls to curb emissions and to control environmental impacts only rise over the next decade, contractors and building managers will make green practices an increasing core part of their business. This will take root as a matter of self-interest, as well as social responsibility, regardless of the direction of state and national policy. Planning to resist fires in fire prone areas needs to start before the onset of the new fire season in the spring of 2019. It might be worth examining how communities sustained fires in the “white villages” of Andalusia in Southern Spain and other parts of Mediterranean for centuries and learn from them. We should never again endure a loss of lives and properties at the scale that affected California in 2018.
Housing shortages and the affordability crisis
The statistics couldn’t be clearer: California has a housing shortage of 3-4 Million units. 10% of all US homeless, or over 50,000 people are in tents and under freeway ramps in LA. We need new less expensive housing, and fast. The defeat of the rent control amendment in the Fall indicated that the general population realizes that rent control will not solve this problem. We need to ease zoning regulations, allow easier approval for construction and renovation, eliminate or severely reduce parking requirements for multi-family developments, accelerate the development of transitional housing for the homeless from the funds we already raised, and accelerate the investment in mental health care and job training.
Wishing you a happy, healthy and prosperous New Year. Onward and upward!
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