Analysts Say Defeat of Propositions 15, 21 Would Benefit Commercial Real Estate Industry
By Randyl Drummer CoStar News
November 2020 | 1:21 P.M.
The voters of California, a state that has long been criticized for high real estate and business costs, seem to have embraced staunchly pro-business positions on all seven statewide ballot measures affecting property or business owners. And that could signal broader trends across the country.
Among the decisions, Golden State voters rejected Proposition 21, a statewide measure to expand rent control that was opposed by the state's apartment industry, the second time since 2018 that such a measure has failed to pass. Proposition 15, a measure that would partially repeal California's landmark property tax law to increase taxes on large commercial properties, trailed narrowly.
A measure that would allow ride-hailing firms such as Uber Technologies and Lyft Inc. to treat drivers as independent contractors instead of employees appears set for approval, while an initiative that would have capped profits at dialysis centers in the state is widely being rejected. In both instances, the businesses at stake in those measures threatened to leave the state that leans heavily Democrat if decisions did not go their way.
"Sure, California is blue and leans left, but everyone wants a good quality of life or to run a successful business or to be a part of a successful company," Wes Nichols, founder of San Diego-based consulting firm Paramount Property Tax Appeal, told CoStar News. "At the end of the day, no one wants to pay more in taxes or pay higher costs, especially as a result of a poorly written ballot measure."
California, the nation's most populous state and the world's fifth-largest economy, is often watched a national trendsetter and its sheer size means events there typically create ripple effects nationwide. Its passage of Proposition 13 property tax law in 1978 was seen as a bellwether in what became a widespread and enduring nationwide revolt against higher taxes in the 1980s.
The state, which led by a majority of Democrats in the legislature and governor's office, has been widely criticized by the commercial real estate and and other industries for what they call increasingly high taxes and real estate costs as well as excessive regulations.
As the pandemic hammers on the state's economy and businesses, announcements have been making headlines from companies as varied as brokerage CBRE Group Inc., data software firm Palantir Technologies and investment firm Canyon Partners that they plan to move or relocate their headquarters addresses to Texas and other lower cost states.
Seeming to resonate with voters are efforts by the state's commercial real estate industry and business groups to defeat most of the Nov. 3 ballot measures that could have increased costs further and hurt more businesses and workers as they try to recover.
The state elected Democrat nominee and former Vice President Joe Biden over commercial real estate developer and incumbent Republican President Donald Trump by a 2-1 margin on Tuesday, according to initial results. But the preliminary results from state ballot measures signal California voters may not be as eager to increase taxes, costs or regulations on businesses as its national reputation may suggest.
The apparent defeat of the two California real estate propositions is a victory for real estate investment trusts with heavy concentrations of office, industrial, office and retail property in the state, Piper Sandler equity analyst Alexander Goldfarb said in a note to clients. Heavy debt loads on retailers and the retreat of lenders from the property market are expected to continue to be major issues for retail real estate.
More broadly, the apparent failure of Democrats to create a so-called electoral blue wave across the United States could benefit real estate owners nationwide.
"While the election remains undecided, the lack of a massive Democrat sweep greatly diminishes the chance for national apartment rent regulations and forgiveness," Goldfarb said. "It also lessens the chance for higher taxes and regulations, which should be positive for consumer and business growth decisions."
Roughly 53% of California's record 22 million registered voters had already returned ballots on the eve of Election Day, according to Political Data Inc., a Norwalk, California-based voter data firm. The 11.6 million voters that had already cast ballots as of Nov. 2 equaled more than three-quarters of the record 14.6 million Californians that voted on Nov. 8, 2016, according to the California Secretary of State's Office.
Results are expected to change slightly as vote-by-mail ballots, provisional ballots and other ballots are tallied in coming days in the election, which must be certified by Dec. 11 under California law, according to the Secretary of State's Office.
Opponents, including large publicly traded apartment, office, industrial and retail developers, spent more than $170 million to defeat the two real estate-focused ballot measures.
Supporters and opponents of California’s 12 ballot proposition spent at least $805.5 million as of Nov. 2, including at least $157.5 million spent on Proposition 15, and at least $136 million poured into Proposition 21, which would modify a 25-year-old state law that limits cities' ability to enact forms of rent control.
However, spending on both measures pales in comparison with the $224.7 million spent on California’s most expensive campaign, Proposition 22, a measure sponsored by Uber and Lyft that would allow ride-hailing and delivery companies to continue employing drivers as independent contractors.
More than 58% of voters approved Proposition 22, according to unofficial results.
A coalition of real estate and union groups, seniors and firefighters supported by the California Democratic Party spent $47 million to pass Proposition 19. That measure would expand a property tax break for seniors but restrict tax breaks in real estate transfers between parents and children.
Jordan Kaplan, president and chief executive of real estate investment trust Douglas Emmett that is one of the largest office owners in Los Angeles, told investors this week that talk of an exodus of residents and businesses may be exaggerated as a way of venting frustration about the high taxes and regulations.
"But I also think that the state is focused on business recovering and getting back to being able to employ people," he said on a call Tuesday. "And so while I know there's been a lot of conversation about additional taxes and focus on taxes, I also think that, in every area, people are focused on creating a better environment for jobs and employment recovery."
With at least partial results reported from all 20,497 California voting precincts, almost 52% of voters rejected Proposition 15, which would dramatically overhaul the state’s 42-year-old Proposition 13 property tax law by creating a so-called split tax roll that allows higher assessments on larger commercial and industrial real estate.
If passed, Proposition 15 would allow the state to tax offices, warehouses and factories, malls and shopping centers, theme parks and hotels and other non-residential properties based on current market value instead of purchase price. The measure is intended to raise billions of dollars annually to fund schools and local governments by changing 1978’s Proposition 13, which bases taxes of all California property on the purchase price.
Californians appeared to believe the arguments by opponents that creating a split roll tax for commercial real estate could lead the way for the repeal of property tax protections for residential property owners, and that businesses would bear the ultimate burden of higher commercial real estate taxes, Goldfarb said.
John Kilroy, CEO of Kilroy Realty Corp., one of the West Coast’s largest office developers, has emerged as one of the most outspoken opponents of the measure, and other California commercial landlords, including Los Angeles-based office owner Hudson Pacific Properties Inc., also taking an active role in opposing the measure.
Proposition 15 sponsor Schools & Communities First, an umbrella group that includes teachers, labor unions and community groups and their supporters, had spent more than $82 million as of Nov. 2 to pass Proposition 15. The advocacy arm of the Chan Zuckerberg Initiative, a philanthropic group established and owned by Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, led all supporters in donation over $12 million.
Just under 60% of voters rejected Proposition 21, the second attempt by activist Michael Weinstein and his Los Angeles-based nonprofit AIDS Healthcare Foundation to greatly expand rent control by revising the state’s 1995 Costa-Hawkins Rental Housing Act to allow cities to impose rent control on units at least 15 years old, according to unofficial results posted by the California Secretary of State's Office.
The National Multifamily Housing Council and the California Apartment Association applauded the defeat of Proposition 21.
"For the second time in as many election cycles, the people of California have spoken loud and clear and defeated short-sighted rent control ballot measures," the National Multifamily Housing Council said in a statement.
Proposition 21’s rejection is a "victory for hardworking Californians who deserve real housing solutions that increase supply and bring costs down and a signal that voters recognize that rent control is not a sound solution for housing affordability," the California Apartment Association said in a statement.
"Lawmakers, community leaders and the housing industry need to work together to make housing affordability a genuine priority, especially at a time when home is our safe haven," the association said.
While the AIDS Healthcare Foundation raised more than $40 million to defeat the measure, large real estate investment trusts ranking among the 10 largest apartment owners in the United States and other real estate interests poured at least $95 million in donations to defeat the measure as of Nov. 2.
The fight over rent control in the nation's most populous state has been growing since voters rejected Proposition 10, a similar ballot measure to expand rent control by dismantling 1995’s Costa-Hawkins Rental Housing Act. Lack of affordable housing has contributed to creating the country's largest population of homeless people, which could expand during the coronavirus pandemic if a statewide eviction moratorium expires.
By early September, the measure was one of California’s most expensive election campaigns, with millions being added to the total weekly as both sides entered the stretch run in a high-profile statewide and presidential November election that could be decided by a record-high turnout of voters.
Goldfarb said Proposition 21, the rent control measure, failed because voters decided it would increase the housing shortage by discouraging new construction and supply.
However, the rejection of the measure isn't expected to change the prospects for continued rent growth in California's largest coastal markets such as Los Angeles and the San Francisco Bay Area, which posted some of the largest gains in the country before the coronavirus pandemic-fueled economic downturn that started in March.
The fight by Uber and Lyft to pass Proposition 22, which would exempt app-based drivers from a new California law designed to treat more workers like employees instead of independent contractors, quickly turned out to be the most expensive on a crowded Nov. 3 California ballot.
Uber and Lyft, which drew national attention by legally challenging the law and threatened to leave the nation's most populous state over the restrictions, have also led efforts to pass Proposition 22. Fast-growing delivery companies such as Postmates, Instacart and DoorDash, also support the measure.
Committees representing the ride-hailing firms and delivery services contributed more than $204.3 million through Nov. 2 to pass the measure, according to the California Secretary of State.
Opponents, including labor unions such as United Food and Commercial Workers International, Service Employees International Union and the California Labor Federal, contributed $20.4 million as of the day before Election Day.
California Gov. Gavin Newsom in September signed a bill that exempts dozens of occupations, including some in real estate, from the state’s criticized labor law. However, the law did not include the ride-sharing and delivery firms, which have leased large blocks of office space in the San Francisco Bay Area and other California regions.
More than 64% of voters rejected Proposition 23, a California ballot that would have capped profits for the state's fast-growing networks of dialysis clinics, mirroring the results of a similar defeat two years ago. Its defeat was fueled by more than $100 million in donations in opposition by two of the largest kidney care providers in the United States.
Opponents poured more than $105 million into the fight against the measure that would have required at least one physician or nurse practitioner at dialysis clinics whenever patients are receiving treatment.
The Service Employees International Union and United Healthcare Workers, who sponsored the measures in 2018 and again this this year, have fought the dialysis treatment industry, saying they want to improve treatment. Unions and the California Democratic Party donated $11.6 million to support Proposition 23.
Under the latest measure, infection rates would need to be reported to the government and state approval would be needed for clinic closure or service reduction.
The largest dialysis providers, Denver-based DaVita Inc., and German dialysis supplier Fresenius Medical Care, have ranked among the top U.S. commercial property tenants for several years, according to CoStar data.
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