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STATE OF EMERGENCY

California was declared under a perpetual state of emergency by Governor Brown and now Governor Newsome due to the damaging wildfires that seem to occur like clockwork every year. They also appear to increase in magnitude and frequency annually. The golden state has experienced devastating wildfires such as the Paradise (Camp Fire) and Santa Rosa (Tubbs) sparked by downed power lines, warm weather, and high winds. It’s estimated that greater than 200,000 people have been displaced through evacuations or because they’ve lost their homes just in the SF Bay Area region alone this year.

They’re not only devastating but tragic and costly. The State of California will spend over $1 Billion dollars this year in fighting these fires but the cost to retailers, businesses, and consumers is in the billions as well. Not to mention that the loss of housing will further perpetuate the shortage which is estimated at 4 million units statewide!

Below I discuss the most important topics surrounding our catastrophic wildfires and the ripple effect it has caused in our state.

INSURANCE CRISIS

According to the LA Times article published on 5/8/19, insurance claims for the prior year exceeded $12 billion dollars. Now add to that the insurance claims from this year’s fire destruction. This is a huge problem for insurers as they attempt to honor benefits while at the same time figure out how to stay in business. It’s estimated that nearly 500,000 CA homes worth a combined $268 billion are in an at risk fire hazard zone according to an article published in the Sac Bee referencing Zillow statistics. CoStar Research recently released a statistic that approximately 2 Million housing units are in a fire hazard or at extreme risk of wildfire. We’ve heard directly from clients that many insurance companies are dropping their coverage even when there’s no claim because they’re hedging against future forest fires.

Many insurance carriers are not able to pay out all their claims and stay in business plus many are exiting the California market all together leaving the consumer with very few options. This will lead to an increase in premiums, less coverage, and put even more pressure on housing because insurers will only insure urban developments outside of fire zones going forward.

We have personally spoken with several owners of apartments and mobile home parks located within fire hazard areas about this very issue. Some have gone years with only general liability insurance because either their property insurance premiums were exuberantly high or they could not obtain any coverage. Several owners claimed that their carriers had dropped coverage despite never having filed a claim.

This crisis negatively impacts property sales and values especially in fire hazard areas because buyers will find it nearly impossible to obtain insurance. Without insurance lenders will not provide financing or if the insurance premiums are high it means the borrower will qualify for less which requires a higher down-payment.

The PG&E EFFECT

Pacific Gas and Electric, northern California’s largest electrical and gas provider, has taken the brunt of the blame for the most recent catastrophic wild fires. High winds have caused many of their power lines to fall sparking these fires. This blog is not to debate who is at fault, I’ll leave that up to the courtrooms to determine. As a solution, PG&E has ordered mandatory shutoffs of their electrical grid throughout many regions of N. California including urban suburbs leaving millions of residents and businesses without power. These shutoffs are estimated to have cost the consumer and the state over $2 Billion dollars per day in losses! The real issue is that their power grid is outdated as electrical power lines belong below ground. The problem is that the cost to move these lines underground is prohibitive since PG&E estimates $3 million dollars per mile to move their lines underground (CoStar Research). Currently, the utility provider has 81,000 miles of distribution lines of which two-thirds (2/3) are above ground and would cost PG&E an estimated $243 billion (CoStar Research).

Labor Markets

Governor Newsome’s publicly declared that his goal is to create 3.5 million units of housing by 2025. That’s a great goal and would help tremendously improve the housing crisis.  The issue is that we’re short an estimated 200,000 in construction workers to build the necessary housing (CoStar Research). This figure does not even include architects, contractors, and other vendors that are already stretched building existing projects which offer a much greater profit margins than building in more suburban/rural markets. This has already resulted in greater construction costs as contractors have to pay a higher wage to attract workers which applies to the entire supply chain creating higher supply costs. Since construction costs are so high this means that only projects in higher income areas are the most profitable as consumers have more purchasing power which allow profits for developers. The majority of new housing, retail, and other developments will continue to occur in higher income markets versus rural, urban-rural interface, and Class B-D neighborhoods which will further exacerbate the housing crunch.

Tipping Point

Based on my experiences traveling to properties and meeting people throughout the Central Valley, we’ve reached a tipping point. Meaning, that if the state, utility providers, municipalities, and property owners don’t make significant changes it will perpetuate our biggest issues into a tailspin. Lack of affordability, lack of housing, labor scarcity, electrical blackouts, and rising construction costs may lead to runaway asset prices (inflation) relative to incomes, higher consumer prices on goods and services, and much higher income taxes to cover the costs of this mess. This will cause many people to flee the state or live in urban environments where there’s already a huge shortage of housing.

Typically, when asset prices dramatically increase as they have over the past several years, developers/investors seek cheaper markets such as the central valley and lower foothills. According to CoStar Research, almost half of the housing units built in California between 1990 and 2010 are in areas categorized as potential wildfire hazard zones. The issue builders, investors, and buyers will face is the availability of insurance coupled with the high cost of it. Undoubtedly, rents along with consumer prices will increase further exacerbating the inflationary cost of living in the state.

Solutions

Although it will take several years it’s important that we start moving towards solving the real issues facing our state.

  • Better Immigration Policy that will attract a quality and affordable labor force. Our current Federal immigration laws are outdated and require revision. In this day of incredible technological advancements it’s possible to streamline this process much more efficiently than requiring illegal immigrants return to their native country then reapply to enter. A system that rewards working, asset purchases, and paying taxes is one that benefits the entire economy. The current American labor force has not stepped up to meet the demand. In great part because they require too much pay for the type of work. There’s a huge disconnect between the value a job brings to the market place and what the labor force believes it should compensate. Without a strong consistent labor force we’ll never build ourselves out of this housing crisis and continue to lose valuable citizens to other states.

 

  • Forestry Management is needed immediately. Our current state of emergency caused by wildfires is due to an accumulation of decades of doing nothing. Overgrown vegetation and shrubs now act as fuel to these fires causing them to burn at an uncontrollable rate burning over 10,000 acres an hour. Forest fires are not a new phenomena to CA but their frequency and devastation are now commonplace. Cal Fire, BLM, PG&E, and property owners should devise an immediate plan for deforestation. Otherwise, we’ll have this perpetual issue each year where wildfires burn uncontrollably throughout our state which have recently occurred in suburban housing developments as well. For a state that is so environmentally conscious these forest fire carbon emissions have most likely caused more damage to our ozone than all of our diesel trucks driving our interstates. The majority of our rural population will move to urban infill cities as they’re exhausted of fleeing forest fires each year.

 

  • Upgrading the Power Grid which has been neglected for decades. Two-thirds (2/3) of PG&E electrical lines are above ground. It’s estimated that it requires in excess of $250 billion to move the lines underground. Until this happens areas serviced by PG&E and Edison Electric will have multiple power shutoffs during fire season which will cause billions of dollars in daily losses to residents and the state. If PG&E cannot afford to pay for these upgrades then they should sell off portions of their grid to companies that can absorb the cost and make the improvements efficiently.

 

  • Cooperative Insurance fund that builders, investors, and residents in rural areas within fire hazard zones pay premiums into which will cover losses. As insurance companies leave the CA rural markets within fire zones all together we’ll need some sort of insurance to promote construction and ownership.

 

  • Building high density housing in urban-infill cities and suburban developments. CA recently passed a bill making it easier to rezone properties and reduce some of the red tape associated with building. The next step is to reduce the permit fees significantly to promote new construction of housing especially as we enter this new phase of statewide rent control. As more of the population moves back into urban areas we’ll experience a decrease in the amount of devastating forest fires. Fires will be allowed to burn which in turn clear the forest of dead shrubs plus the fires are less likely to be propelled by bursting propane tanks and cars full of gasoline.

 

  • In closing, California is now facing a serious housing crisis caused by decades of obstructive policies, legislation, minimal forestry management, and rapidly rising housing costs which have forced residents into the wildland urban interface which is the area between urban land and wildfire zones (CoStar Research). Almost half of the housing built in California between 1990 and 2010 were built in these fire zones. This has caused a huge conundrum because previously when wildfires struck, firefighters would allow the fires to control burn slowly deforesting the excess vegetation. Now, firefighters are required to act quickly in order to save residents living in wildland urban interface areas which is estimated at over 2 million households. Furthermore, the housing in these areas have propane tanks and resident vehicles full of fuel which are extremely combustible. These fuel fires well beyond any sort of vegetation or bushes could ever accomplish causing fires to burn uncontrollably at a rate of 10,000 acres per hour in many cases.

Urban infill markets such as Sacramento along with the Central Valley will realize the biggest gains in housing caused by a huge influx of residents permanently escaping fire zones and working families fleeing the high cost Bay Area/Los Angeles markets. Rents and housing prices will continue to increase even with rent-controls and minimal new construction. Housing and commercial properties not supplied by PG&E electric will be in high demand and preferred by consumers. Neighborhood retail centers will experience higher occupancy rates as more businesses open to fill the demand for consumer services.

California has hit a tipping point that will take decades to correct with many obstacles and struggles along the way. In the short-term (5-7 years) we’ll continue to experience inflationary pressure on asset prices, rents, utilities, medical, and overall consumer goods. In the end we’ll prevail if we deal with the punches head on, right now.

 

Written by Adrian Del Rio