Housing developers may have thrown their hard hats into the air to celebrate the news that California Governor Gavin Newsom is reforming the California Environmental Quality Act (CEQA) to speed up new construction in the state.
The Worst Housing Market in the Nation
California has experienced some of the worst housing shortages in the nation. According to estimates reported by Cal Matters, a nonprofit news organization, there is a shortfall of 3.5 million homes, with over 3 million renters and 1.5 million homeowners exceeding the 30% and 50% thresholds for cost burden, respectively. Homes in the state are priced twice the national average, and rents are 50% higher, Cal Matters reports.
On July 1, Newsom signed two major laws overhauling the CEQA act, declaring, “This was too urgent, too important, to allow the process to unfold as it has for the last generation.”
Urban Areas Will Benefit the Most
The changes apply to a variety of different construction projects, including infill housing projects under 20 acres that aren’t in hazardous zones, childcare centers, food banks, wildfire mitigation efforts, advanced manufacturing, and even high-speed rail. Supporters of the changes believe the reforms will reduce costly project delays, which have deterred developers from building projects in the state in the past.
“The impact of these bills will be most pronounced in the state’s major metropolitan regions, where the housing crisis is most acute and the supply of infill-eligible land is most plentiful,” Meredith Parkin, environmental practice leader with multidisciplinary national consulting firm Environmental Science Associates, told Forbes.
Slashes Costly Time Delays
The changes slash costly time delays for developers, where, Cal Matters points out, they will no longer “have to study, predict, and mitigate the ways that new housing might affect local traffic, air pollution, flora and fauna, noise levels, groundwater quality, and objects of historic or archeological significance.”
Importantly, the new reforms do not change single-family zoning in the state, which means it is likely skewed more toward rental units, which affect middle- and lower-income communities, most affected by the housing shortage.
Many real estate developers feel that California has adopted an anti-development stance, which has nothing to do with the environment but is more aligned with anti-developer sentiments.
It’s “one of the biggest obstacles to housing development—even for small- and mid-scale residential projects that are otherwise aligned with local planning goals,” San Francisco real estate professional Arezou Shadabadi told Forbes, referring to CEQA. She added that over the past two decades, “I’ve seen CEQA weaponized by local groups, not for environmental reasons, but to block new housing.”
She called CEQA “a tool for litigation rather than conservation.”
“A Rich Person’s Game”
Jennifer Hernandez, a land use lawyer who runs the West Coast land use and environmental group for Holland and Knight, agreed, telling Multihousing News, “It became a hugely rich person’s game to try and develop in California because you had to have such staying power.”
The Dissenters
The changes to CEQA have not been met with open arms everywhere. The news has particularly chagrined environmentalists and some politicians.
“Jeopardizing those whole ecosystems, I think, is a risk that we don’t want to take,” State Senator Catherine Blakespear, a Democrat, told The New York Times. The environmental organization Sierra Club California has dismissed the overhaul as “half?baked,” warning that it “could disproportionately damage low?income neighborhoods and fragile ecosystems.”
Kim Delfino, an environmental lobbyist, said the law would allow the destruction of coastal habitats, forests, deserts, and grasslands. She called it the “worst bill” for imperiled species that she had seen in a quarter-century of advocacy.
“It blows a hole in our efforts to protect habitat,” Delfino told lawmakers, the New York Times reported. “Make no mistake, this will be devastating.”
Overwhelmingly, though, the changes appeared to be met positively, with most Democrats in the state falling in line with the governor. “The crisis has metastasized to such a level that our constituents are demanding it,” said assemblywoman Buffy Wicks, from the Bay Area, who wrote the bill to encourage high-density housing projects.
How the Bill Helps Investors
California’s spiraling homelessness has overridden the need for painstakingly slow environmental protection, bringing developers back to the table.
“This is major, major reform. We are thrilled.” Sean Burton, chief executive officer of Los Angeles-based multifamily developer Cityview, told The Wall Street Journal.
“A lot of investors have redlined California,” Burton said, referring to developers who have disregarded California because of its environmental red tape. “Now, you’re going to see a lot of people give California a fresh look.”
While larger developers are no doubt rejoicing at the reforms, small developers also have reason to be cheerful. Matt Lewis, director of communications for California YIMBU, told Bloomberg that it is now “historically, unprecedentedly fast and significantly cheaper to build infill housing up to seven stories around transit stops throughout the state. Over the next five to 10 years, you’ll really start to see the change.”
Final Thoughts
The new laws, while celebrated, only put California on an equal footing with other developers nationwide. They will still face the same hurdles, notably the effect tariffs will have on construction, high interest rates, and difficulty in finding competent workers, which might be even more pronounced in California with the immigration crackdowns.
However, for investors who can either make a larger down payment or buy with cash, the influx of new for-sale condos or small apartments could create new revenue streams and a constant supply of tenants to fill them, putting California back on the investment map.
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