Oct 13, 2008
By: Eugene Gilligan, Senior Editor

California’s looming fiscal crisis is likely to take its toll on the state’s commercial real estate sector. The credit freeze-up had deprived California of up to $7 billion in short-term financing necessary for day-to-day operations.

The fiscal difficulties will likely manifest themselves in two ways. If the state is forced to raise taxes to cover the budget shortfall, job losses may result if higher taxes slow the economy, so office vacancy may increase, said Gary Painter, professor of policy planning and development, and director of research at the Lusk Center for Real Estate at the University of Southern California.

He told CPN that a more direct effect could be felt in office vacancy if the state is forced to lay off workers, a move it has so far resisted, he said.

But whatever impact the fiscal crisis will have on commercial real estate, the state “is between a rock and a hard place,” said Stephen Cauley (pictured), associate director of research at the Ziman Center for Real Estate at U.C.L.A.

The state will have to provide more services to its growing immigrant population, many of whom are lower income workers, while its revenue stream will be challenged, Cauley told CPN. The state has a highly progressive tax system, and depends on capital gains taxes for a good portion of revenues, he said. “Who is getting capital gains these days?” he asked.

The state’s high-tech sector, for instance, could feel the effects of a slowing national economy, Cauley said. Due to the state of the economy, “companies may feel they can put off buying that new computer system they were going to buy.”

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