1. Expect Some Volatility in the Market

The economy is strong and growing — perhaps too quickly as the labor market remains tight. A surprising number of people are choosing to stay out of the labor market, for now, contributing to the supply chain disruptions affecting production. At the same time, inflation is holding steady at the highest levels seen in 40 years. This is due, in part, to all the money pushed into the system during the pandemic. In response, the Fed will raise rates — likely in March — and this will make it more expensive and harder to build until the supply chain challenges and labor shortages are over.

Two years into the pandemic, we still seem to have more questions than answers about the future of the economy and real estate markets. As the Fed’s monetary policy shifts, the answers to these questions may become clearer. What we do know is that people need a place to live, and the current housing is insufficient to meet demand.  Also, the demand for warehouse space continues unabated, as consumers continue to demand prompt delivery of goods.

2. Shelter Trends: The Multi-Family Market Is Hotter Than Ever

Several factors are colliding to keep the multi-family market hot despite the rise in existing home prices and new pending sales. A lack of inventory and record-high home prices are steering potential homebuyers to the rental market, including Millennials in the prime home-buying age of 30 to 32. Recently, there has been some growth in single-family starts, and the top markets in the state include Riverside, San Diego, Sacramento, Los Angeles, San Jose, and San Francisco.  Also, developers are taking advantage of the California Legislature’s recent adoptions of pro-housing legislation, which places pressure on local government to approve residential projects.

3. Build-to-Rent Is Gaining Interest in California.

The build-to-rent space is not a significant player in California real estate, but it is taking up a bigger share than it did in the past. Not only is the market evolving, but there is plenty of capital available now looking for a project. Affordable housing players are keeping an eye on what happens in this space as these projects reduce the available land for other developers. Demand for single-family rental communities and horizontal apartments is holding up, attracting more investors.

4. New Law Creates Pathway for Greater Online Public Access to Development Records

AB 819 has been signed into law, requiring lead agencies to submit all NDs, EIRs, and MNDs to the state clearinghouse where the public — including project opponents — will have enhanced access to them. This law may take on even greater significance in the wake of two recent rulings. In Farmland Protection Alliance v. County of Yolo, a trial court struck down an MND and ordered an EIR because of the project’s potential impact on three species of birds. The appellate court held that CEQA does not allow a deficient MND to stand while waiting for a partial EIR. In another case, Mission Peak Conservancy v. State Water Resources Control Board, the petitioner challenged the use of a CEQA Exemption to divert water into a storage facility. The court upheld the Board’s determination that the registration process was not subject to CEQA because it was ministerial.  Developers should carefully review local ordinances to determine whether needed approvals can be considered to be ministerial and thus not subject to CEQA.

5. Recent Ruling Interprets Pro-Housing Laws Broadly

In Ruegg & Ellsworth v. City of Berkeley, a developer withdrew plans for a mixed-use project after facing opposition from the city and community. It then submitted a new plan for a larger project with 50% of the properties designated for affordable housing, which the city denied. The trial court upheld the denial, and the appellate court reversed the ruling, which reflects a broad interpretation of affordable housing laws.

6. Petitioners Must Comply with Agency Appeal Procedures

Exhaustion of administrative remedies requires the petitioner to comply with the agency’s appeal procedures. In Stop Syar Expansion v. Napa County, the court upheld the county’s certification of an EIR for a quarry expansion project. This action underscores an important principle: the petitioner must follow the administrative appeal procedures completely and exactly as described. In McCann v. City of San Diego, a similar ruling dismissed the petitioner’s challenge because it did not exhaust administrative remedies. It also allowed the city to create and administer the exemption process without a public hearing. According to Schmid vs. San Francisco, an allegedly confusing and difficult-to-follow appeals process does not mitigate the petitioner’s requirement to exhaust all administrative remedies.

7. CEQA Claim Without Merit Doesn’t Hold Up in Court

Dunning v. Johnson offered some hope for developers challenged by vexatious CEQA petitioners. The developer filed a malicious prosecution lawsuit against the unsuccessful petitioner of a previous CEQA lawsuit. In its ruling, the court found that the developer was able to prove the original CEQA claim had no legal merit and was filed maliciously by the petitioner, who argued the project would have a financial impact on their business. Although this case is likely useful only in the most egregious cases, it does provide a potential tool for developers in the future.

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