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SACRAMENTO, CA-The state budget that Governor Jerry Brown signed last Wednesday may have resolved some long-argued issues, but its impact on commercial real estate could be damaging and difficult to remedy. GlobeSt.com spoke with industry experts to get their take on the budget’s implications for CRE. The upshot? Too many cuts to issues that matter to Californians—enough to possibly drive residents from this state to others more sensitive to these issues.

“My view is the California budget is a product of very short-term planning causing long-term distress,” Sandy Sigal, chairman and CEO of NewMark Merrill Cos. “Look at the action the governor has taken to abolish redevelopment agencies. It’s difficult to do any redevelopment or attract any new development.”

Indeed, as GlobeSt.com previously reported, the passing of ABx1 26 a few months ago, which dissolved redevelopment agencies in the state and moved their pending cases to successor agencies, has caused quite a bit of uncertainty and distress in the commercial real estate sector. But one of the budget trailer bills, AB 1484, “is the next installment in this ongoing story,” T. Brent Hawkins, a partner with Best Best & Krieger in Sacramento, tells GlobeSt.com. “AB 26 was a terrifically flawed piece of legislation. The new bill, from the standpoint of cities, only makes things worse. It strengthens the hand of the State Department of Finance in clawing back assets held by the former redevelopment agency that are now held by successor agencies and provides penalties for non-payments.”

Hawkins adds that AB 1484 reinforces what AB 26 did, which was to dismantle redevelopment and make tax-increment funds unavailable to assist development. “It’s AB 26, only worse. I expect there will be more bills like this in the future. It’s a poorly thought-out, poorly drafted bill that’s going to create a whole bunch of problems that are going to have to be fixed eventually.”

Bob Hunt, managing director of Jones Lang LaSalle, tells GlobeSt.com that the redevelopment morass, rather than clearing, continues to get murkier for commercial real estate executives. “The closer we watch it, the more confused we get.”

In addition to leaving redevelopment in a lurch, the new budget also slashes funds for education in a state that is already reeling from budget cuts in this area. “We will continue to suffer from a lack of investment in education, which continues to get whacked and continues to make our neighborhoods less desirable,” says Sigal. “It may come to people leaving their areas and the state overall.”

The education cuts—along with cuts to social services—were made with the governor betting on voters approving more than $8 billion in temporary tax hikes in November, a move that many feel is risky. Hunt says his firm is much more conservative about this revenue figure, considering it more like $6 billion, coming from a .25% sales-tax increase and taxing top California earners a greater amount. “What happens if the tax increase doesn’t go through? How do you unwind mid-school year? There’s a lot of uncertainty over this budget, whether it will deliver as assumed.”

CRE executives also fear the domino effect of cutting the education budget further, inflicting more damage on an already ailing education system—that once set the standard for education worldwide—and decreasing enrollment in colleges and universities. The effect of that is fewer student-housing opportunities, which damages developers and construction companies as well as the financial institutions that work with them. “We had a real economic engine, and now it’s going the other way,” says Hunt. “Housing collapsed—there’s no real housing market in California anymore, and at one time we arguably led the country in housing starts. Commercial real estate in some areas is very strong in the Bay area and Silicon Valley, but elsewhere in public design and construction, the states, cities and municipalities have no money, and redevelopment is lost.”

Sigal is also concerned about the lack of funds for infrastructure improvements, which the new budget doesn’t resolve. “We used to be the #1 state in the country as far as development of highways and availability of resources to the cities, and these resources are just not there anymore.”

Still, the news in the state isn’t all bad. “The tech industry and life sciences are doing well,” says Hunt. “It’s not all gloom and doom in California, but the recovery is pretty localized. Central Valley is hurting big time, and there’s an uneven recovery around the state.”

Instant Insights /

New Budget Short-Sighted, Say CRE Experts

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