Through the first nine days of November, there have been major events that will shape the economic landscape for California for years to come. First, Prop 15, the ballot initiative to change the way commercial and industrial properties are taxed, was not voted into fruition. Not a week later, Pfizer has announced that their vaccine for COVID-19 has a 90% effectiveness rate in their test patients that span around the globe. Both of these events will have major impacts in the coming years for our state’s economy, and we should start seeing the effects immediately.
In 1978, Californians approved Proposition 13, which required that residential, commercial, and industrial properties are taxed based on their purchase price. The tax is limited to no more than 1 percent of the purchase price (at the time of purchase), with an annual adjustment equal to the rate of inflation or 2 percent, whichever is lower. According to the state Legislative Analyst’s Office, market values in California tend to increase faster than 2 percent per year, meaning the taxable value of commercial and industrial properties is often lower than the market value. If approved, Prop 15 would manipulate the taxes on commercial and industrial properties from being taxed on the purchase price to being taxed by their market value. This would result in property owners needing to raise rent/lease prices in order to pay for the added taxes to their investments. As a result, companies would continue their exodus out of California in search of cheaper real estate and better tax benefits. Now that it has been decided against, property owners can continue to provide office spaces throughout California at reasonable prices. This means there will be a continued push to revamp commercial space for businesses for years to come.
The announcement that Pfizer has a vaccine with 90% effectiveness is already having massive market impacts across the globe. But what does it mean for our industry? According to CBRE analysts, “We anticipate wide distribution of the vaccine in the first half of 2021 and a return to more normal economic conditions by the second half. During the latter half of 2021, office occupancy should materially increase and brick-and-mortar retail should more fully benefit from a resumption of activity.” Essentially, there is light at the end of the tunnel. The second half of 2020 has been a waiting game for commercial construction. Waiting for companies to feel comfortable moving back into offices, then waiting for those companies to make a deal with property owners and their leasing managers. As a result, we have seen a decline in commercial construction across all of Southern California. But now that the vaccine has proven to be so effective, leasing teams and companies can be more aggressive with communications with plans to get back to working in an office as soon as the first half of 2021.
All in all, November has been great for the Commercial Construction industry. Companies will not only be more inclined to stay in California due to Prop 15 being avoided, but we will also start seeing an uptick in work due to Pfizer’s vaccine. We can’t wait for 2021!!