I recently had the pleasure of sitting down for a Q&A on California’s commercial real estate, my experience in the industry, and perspectives on where we are and where we’re headed. I hope this contributes to the ongoing dialogue in our industry and throughout the state.
In the dynamic arena of California’s commercial real estate, where dreams collide with daunting realities, Akki Patel emerges as a beacon of resilience and hope for agents, developers, and community members alike. Amidst the high stakes and bureaucratic mazes, Patel, a visionary entrepreneur from the Bay Area, shares his insights on thriving in this demanding landscape. Join us as we uncover the secrets to transforming California’s challenges into lucrative opportunities, turning adversity into adventure and success.
Can you give us an overview of your experience in the real estate sector, particularly in California?
For nearly 25 years, I’ve been immersed in the world of Commercial Real Estate, building both properties and communities as the founder and CEO of LRE & Companies. Based in San Rafael, California, we’ve brought to life 25 diverse commercial projects across the Bay Area and beyond. Drawing from our deep roots in California’s real estate scene, we’ve ventured into Nevada with ease, driven by our passion for growth and community enrichment.
What are some of the unique challenges you’ve faced as a real estate developer and investor specifically in California?
California is one of the nation’s strongest economies, comparable to that of an independent country. But navigating its landscape definitely presents unique challenges. As a developer, I’ve encountered significant development risks due to some cities’ reluctance to embrace opportunities as readily as those in other states. The regulatory environment and high cost of living in California pose unique challenges, ones that may not suit every investor.
Tell us more about the current regulatory environment for real estate development in California. How would you describe it?
A wild ride is the easiest way to describe it! It’s a complex and evolving landscape. We have strict environmental regulations like the California Environmental Quality Act (CEQA), numerous zoning laws, restrictions, and land use regulations that significantly shape development opportunities.
What impact have zoning laws and building regulations had on your projects in the state?
The first thing we have to think about is entitlements, which is more commonly referred to as red tape. That’s the first step in the process. Obtaining entitlements can be a complex and time-consuming process, involving endless negotiations with various government agencies and community stakeholders. You could buy a piece of land and never obtain the necessary entitlements, leaving you with land you can’t develop. That can be a big risk for CRE investors and developers. Many cities are seeking developments in hospitality, housing, and retail, which benefit the community economically through job creation and increased tax revenue, but they don’t always make it easy to cut the red tape.
What are some of the biggest hurdles you’ve encountered in obtaining permits and approvals for your projects in California?
Time is always against us in real estate — and it’s a race we can’t afford to lose. You’ve got to strike when the opportunity’s hot, predicting how the economy will look once your project’s complete. Zoning laws are like a puzzle you have to solve before you can even think about building anything — whether it’s multifamily homes or a drive-thru. But getting through all the red tape can take forever. In California, it can be anywhere from two or more years before a project is turn-key. Imagine trying to turn farmland into commercial space — it’s a marathon, not a sprint. Some cities are more business-friendly, but the bureaucratic grind slows everything down. So, when it comes to the biggest hurdles in getting permits and approvals for California projects, time is the big villain, dragging out the process and testing our patience and grit every step of the way.
Have you experienced any challenges related to environmental regulations and compliance in California? If so, how have you navigated them?
The first thing that comes to mind is definitely the state’s CEQA. It’s what I would call a necessary evil. On one hand, it’s a crucial tool for protecting the environment and ensuring sustainable development. But on the other hand, it adds layers of complexity and delays to our projects. It’s like trying to navigate a maze blindfolded; you know it’s there to guide you, but it often feels like it’s slowing you down more than helping. I do appreciate the intent behind CEQA, but as a developer it’s definitely one of the tougher hurdles we have to clear in California.
California is known for its high cost of living. How does this affect the real estate market and your investment strategies?
California’s renowned for its high cost of living, and it’s a significant factor shaping the real estate market and our investment strategies. While the Golden State offers unparalleled quality of life and cultural diversity, it comes at a steep price. As entrepreneurs and investors, we feel the pinch of inflated expenses, which have surged over the past decade. This reality influences our approach to real estate investment, forcing us to adapt and innovate. We’re constantly assessing market conditions and exploring niche opportunities to stay ahead of the game. Despite the challenges, California remains an attractive investment destination — but success demands grit and savvy navigation of this ever-evolving and sometimes unforgiving landscape.
How do tax policies in California impact your investment decisions and overall profitability?
Well, there is a thing we call the Sunshine Tax. That’s why we are in California, and everyone else who isn’t, wants to be in California. It’s a great state to be in, considering the quality of life, cultural diversity, and extracurricular activities California offers us, right? But it all comes at a high cost. When it comes to tax policies in California, they play a significant role in shaping our investment decisions and overall profitability as commercial real estate investors and developers. The state’s tax landscape directly impacts our bottom line, influencing everything from property acquisition to operating expenses and eventual returns on investment. We must carefully evaluate tax implications, including property taxes, income taxes, and capital gains taxes, as they are crucial aspects of our decision-making process as we strive to maximize profitability and mitigate financial risks in the dynamic real estate market.
Are there any specific regions or cities in California that you find particularly challenging or rewarding to invest in? Why?
Every city has challenges and rewards, regardless of where it is located. We do a tremendous amount of work in Greater Sacramento, the North Bay, and coastal communities, which come with unique challenges. However, I feel that certain cities have done a much better job in terms of their strategic development plans, bringing more businesses into their cities, which creates more jobs and really grows their economic prosperity.
Can you speak a little about the labor costs or shortages in the construction industry in California?
In California, labor costs are a big deal, especially in construction. They’re usually higher than the national average, which can really hike up your project expenses. It’s tough to find skilled workers, especially when the residential market is booming. Even in places like Sacramento, where it’s a bit easier, the struggle is real. And let’s not forget about the high capital and entitlement costs — those add up too. When you’re trying to make a project pencil out, every penny counts. When labor costs are high, it can really throw a curveball into your plans and complicate things even more.
In your opinion, what reforms or changes could improve the business environment for real estate developers and investors in California?
One straightforward solution would be to streamline the entitlement process, allowing projects to be entitled more swiftly. By reducing the time it takes for projects to move through the review and approval stages, we could significantly expedite development timelines. This simple step could provide substantial benefits, enabling developers to take on more projects and assume manageable risks while maintaining the quality of their work. Ultimately, prioritizing efficiency in the entitlement process would be a win-win for developers and communities alike.
What advice would you give to other developers and investors looking to enter or expand their presence in the California real estate market?
If you’ve never ventured into California, brace yourself — it’s quite the journey. It’s no walk in the park to get things done in this state. That’s why many local developers have thrived — they’ve mastered the intricacies after many attempts and many failures. At LRE & Companies, we excel in navigating entitlements and seeing projects through to completion. But it’s crucial to understand that success here requires a unique mindset and considerable time and effort. Simply coming in and expecting to build something overnight won’t cut it. Your dreams will definitely be dashed. California is a long game.
Looking ahead, what trends do you foresee shaping the future of the real estate sector in California?
Looking ahead, I anticipate several key trends shaping the future of the real estate sector in California. One trend is the increasing popularity of micro-unit builds, which offer a strategic approach to maximizing density while minimizing footprint. That’s a win-win for both developers and residents seeking affordability and efficiency.
Also, with the prevalence of high labor costs in California, we are likely to see new innovations to reduce labor dependency in construction. More automation technologies and modular construction methods will usher in the use of prefabricated buildings, with shorter start to finish build times — we are already seeing the start of that now!
Basically, these new trends are just common-sense solutions to the challenges we face in California’s real estate market. It’s all about being efficient, keeping costs down, and being able to roll with the punches as things change here in this challenging but great state!