​The industrial real estate sector in California is currently navigating a complex landscape shaped by evolving tariffs, tax policies, and the initiatives of the Trump administration. Global trade dynamics and domestic policy shifts are creating significant impacts across the state's extensive industrial real estate market.

To provide deeper insights into these critical issues, I (commercial real estate attorney William "Bill" London) will be hosting a seminar on April 22nd at 4:30 PM. This event aims to equip attendees with additional knowledge on how these changes influence industrial real estate and to offer strategies for effectively navigating this evolving environment.

Table of Contents:

• The Tariff Impact: A Closer Look
  • Rising Costs of Construction
  • Material Costs and Availability
• Tax Policy Changes State of Industrial Real Estate in California Tariffs Tax Changes and The Trump Administration
  • Impact of Corporate Tax Reductions
  • State and Local Tax (SALT) Deduction Changes
• Regulatory Rollbacks: The Environmental Angle
  • Potential Impacts of Repealing the IRA
• California's Unique Position
  • Workforce Implications
  • The Housing Shortage Context
• Conclusion

The Tariff Impact: A Closer Look

One significant factor shaping the industrial real estate market is the potential for increased import tariffs under President Trump's administration. Trump has proposed substantial tariffs on goods from various countries, including 60% to 100% on Chinese imports, 25% on Mexican imports, and 10-20% on imports from other regions.

These tariffs could directly drive up the cost of essential building materials, creating a ripple effect across the construction industry. Industrial developments, which heavily rely on materials like steel and aluminum, may face rising expenses, potentially slowing down new projects and increasing overall costs for developers and investors.

Rising Costs of Construction

California's industrial real estate sector is already feeling the effects of rising costs and market pressures under President Trump's administration. During his first term, the California Building Industry Association reported that the cost of a new home increased by $20,000 to $30,000 within just two years—a trend that has also impacted many coastal markets.

However, rising costs are just one consequence. Across California, property values are surging, placing additional pressure on investors, developers, and businesses navigating an already competitive real estate landscape.

Material Costs and Availability

Increased tariffs don't just drive up the cost of imported goods—they also disrupt supply chains, compounding challenges for industries that rely on these materials.

Take lumber, for example. While domestic sourcing is ideal, past declines in housing starts led to sawmill closures, reducing supply. This contributed to an 8% year-over-year drop in sales volumes for lumber manufacturers, as seen with companies like Boise Cascade.

Further exacerbating the issue, the Department of Commerce recently increased tariffs on Canadian wood exports from approximately 8% to over 14%. These tariffs not only raise costs but also create shortages, making it more difficult for builders to access essential materials. Given that the National Association of Home Builders reports an average profit margin of just 11% for homebuilders, these added expenses place significant financial strain on the industry.

Tax Policy Changes State of Industrial Real Estate in California Tariffs Tax Changes and The Trump Administration

Tax policy is another critical factor contributing to economic uncertainty. Bankrate reports that proposed changes include lowering corporate tax rates from 21% to 15% and removing limits on state and local tax deductions.

These tax cuts have the potential to stimulate business growth, encouraging increased investment in industrial real estate. However, their impact will ultimately depend on broader economic conditions and whether other policy shifts create a balanced financial environment.

Impact of Corporate Tax Reductions

Lower corporate taxes could free up capital, potentially allowing businesses to reinvest in expansion or facility upgrades. This, in turn, may drive increased demand for industrial real estate, benefiting the sector as a whole.

However, higher demand can also strain supply chains, pushing material costs even higher. As one economic shift offsets another, the overall gains may be neutralized. Additionally, rising construction costs pose a serious risk, potentially stalling housing projects and further complicating market stability.

State and Local Tax (SALT) Deduction Changes

Eliminating the cap on state and local tax (SALT) deductions could have a major impact on California's real estate market. High property taxes have long been a deterrent for businesses and individuals considering investment in the state. Restoring full SALT deductions could make California a more attractive destination, reducing the financial burden on businesses and homeowners alike.

However, the outcome remains uncertain, as it depends on complex tax regulations and legislative approval. If fully reinstated, the deduction could help offset business costs, making commercial real estate investments more viable by lowering overall tax liabilities and operational expenses.

Regulatory Rollbacks: The Environmental Angle

Environmental regulations play a crucial role in shaping the industrial real estate landscape. During President Trump's first term, reports indicated efforts to roll back more than 125 environmental protections, signaling a broader policy shift. These past initiatives provide insight into current and future priorities.

Agenda 47, for example, outlines goals such as repealing the 2022 Inflation Reduction Act (IRA), a move that could have significant implications for energy incentives and sustainability mandates. Many in the industry are closely watching these developments, as changes to environmental policies could directly impact building and construction requirements, affecting compliance costs and project feasibility.

Potential Impacts of Repealing the IRA

The Inflation Reduction Act (IRA) introduced the Section 179D Energy Efficient Commercial Building Tax Deduction, which incentivizes eco-friendly property improvements. Repealing this provision could remove a key financial benefit for businesses investing in energy-efficient upgrades.

However, some reports indicate bipartisan support for preserving certain incentives, suggesting that a complete repeal may not be imminent. Additionally, there is speculation that relaxing environmental regulations could help businesses lower operational costs, though the long-term impact remains uncertain.

California's Unique Position

California stands apart from other states when it comes to housing affordability. More than 75% of adults describe housing costs as a major issue, highlighting the depth of the crisis. But this challenge extends well beyond the residential market.

With median home prices surpassing $900,000, the impact ripples across the entire real estate sector, affecting industrial and commercial properties alike. These high costs influence business decisions, investment strategies, and overall market dynamics, shaping the state's economic landscape.

Workforce Implications

Several disruptions in the construction industry demand attention. Undocumented workers make up roughly 25% of California's construction workforce, a significant factor in labor availability and costs.

Policy proposals, such as banning mortgages for undocumented immigrants, extend beyond the residential market. Such measures could affect workforce stability, labor costs, and overall construction activity. Additionally, any shifts in immigration policies under the Trump administration could have far-reaching consequences for businesses reliant on a steady labor force.

The Housing Shortage Context

Research indicates that while rents and vacancies have fluctuated over the past decade, the core issue remains housing affordability for low-income families. According to the Department of Housing and Urban Development (HUD), households are considered cost-burdened if they spend more than 30% of their gross income on housing-related expenses.

With median U.S. earnings around $48,000, and many workers earning far less, California's housing market is at a pivotal moment. A combination of economic shifts and policy changes introduces significant risks for investors, particularly those in commercial and industrial real estate.

Proposed policies could have a profound impact on commercial developers investing in California, especially in affordable housing projects, where the risks extend far beyond financial concerns, influencing labor markets, regulatory landscapes, and long-term sustainability.

Here's a snapshot of anticipated changes:

Here are some questions to clarify a current plan:

1. What building materials are crucial for my projects, and what were their previous sources? Real estate investors should thoroughly assess this for all properties under consideration.
2. What are the projected impacts of corporate tax reductions (including worst-case and optimistic scenarios) for creating realistic financial forecasts? Look into different scenarios that might take place.
3. What contingencies exist for significant changes in zoning or land-use requirements? Examine all requirements and anticipate potential issues and delays. Evaluate worst-case scenarios, but also understand the existing project budgets of any properties being looked at.

Conclusion

The intersection of trade policy and tax changes creates both opportunities and challenges for investment and construction in today's market. President Donald Trump's policies have historically sent ripples through the economy, and any new changes under his administration are likely to have similar far-reaching effects. With economic uncertainty ahead, businesses must prepare for a dynamic and evolving landscape.

A proactive, flexible approach is key to maintaining operational stability and mitigating disruptions caused by price fluctuations. Additionally, international relations play a crucial role, shaping policies and regulations that extend across global markets—including California's commercial real estate sector. As these policies continue to shift, businesses and investors must stay vigilant, adapting their strategies to navigate an ever-changing economic environment.

To explore these issues in greater depth, I, attorney William "Bill" London, will be hosting a seminar on April 22nd at 4:30 PM. This event will provide key insights into how evolving policies may impact industrial real estate and offer strategic guidance for businesses and investors looking to stay ahead in a shifting market.