Between Boom and Drought: What California Real Estate Investors Need To Know

One of the most vivid and metaphorically-rich images that meteorology gives us is that of opposing fronts: when a hot front comes in from the west and a cold one blows from the east. These two forces smash into each other in the sky, like invisible armies or belligerent gods. This can produce a storm, or, if they are powerful enough, even a tornado, a violent and confusing cataclysm. Right now California is experiencing similar kinds of battles, on an environmental and economic level, with a huge impact on the real estate market. But in this case, the clash is not between warm and cool air, but between the environment and the economy, with the looming epic drought and the recent economic boom. If you are a real estate investor applying for a hard-money loan for ground-up construction or rehab, you need to be informed on this growing issue, so that you can plan accordingly.

At issue is California’s economic boom of recent years. California was one of the leading states when it came to foreclosures and busts in the construction industry. The state was called the “pivot of the great recession” due to its cratered economy, but a pivot works both ways. California led the nation into recovery, and the construction industry led California.

The boom is partly due to population growth—the state, which has a population of 38 million now, is projected to hit 50 million by 2050. Everyone will need to be housed, and the growing economy is creating houses where there used to be barren land. According to a recent New York Times article, the town of Folsom is looking to bring in 25,000 new people and 10,000 new housing units in the next decade on land that is tucked between rolling hills. This is great for Folsom, until you look a little deeper at mounting environmental issues.  

Folsom Water Blues

Let’s stay on Folsom. As the Times article points out, this isn’t a great period for Folsom Lake, a vast reservoir which provides water for a lot of the Sacramento area, including the town of Folsom. It’s at 29% of its capacity, thanks to years of drought and record temperatures, and is in danger of dropping below its permanent intake valves. There are contingency plans if it drops below intake levels (or even near those levels, as the pipes don’t function as well at less than full capacity), including barges to dump the water over the dam to be sent to local water agencies, but it is still incredibly worrisome.

This, of course, mirrors what is happening nearly everywhere else in California, which is experiencing a historic drought that could change the state for years. Governor Brown has declared a water emergency and enacted strict guidelines for use. Even towns like Folsom, which are building, are restricting water usage for residents by up to 30%.

The tension comes from the human need to grow and expand and the even more human, more elemental need, for clean and abundant water. As a California real estate developer, you’ll have to walk this tense line between immediate profit, long-term viability, and a new environmental awareness.

How California Real Estate Investors Can Manage The Conflict

Luckily, there is a way to manage this tension: getting ahead of the game by building green, eco-conscious homes, or else rehabbing with water regulations in mind. Soon enough you’ll have to do this anyway, but that’s not the point. Buyers understand that they will soon have the same regulations, and want to buy a house, whether it is new or a fix-and-flip, that’s already positioned to comply with these. This not only saves them the trouble of doing it later, but gives them the peace of mind of knowing that they are contributing to the solution, and not to the problem.

Here are a few features that are relatively easy to install and put this into practice.

  • Low-flow showerheads
  • Low-flow toilets
  • Smart appliances like dishwashers and washing machines
  • Lawns that don’t have grass to water (rocks, artificial turf, a natural desert look)
  • Downspout extensions and underground cisterns.

The issues of expansion versus conservation are going to be debated for years, and, if done smartly, there won’t be a need to arrest growth. We can preserve water as long as we don’t think we are entitled to as much of it as we want. Even Las Vegas has figured out solutions and is reversing its water wastage. California can do the same.
Socotra, California’s premiere equity-based lender, can help you get work in the construction boom. Your loan can allow you to execute green, water-friendly retrofits that will make your property much more appealing to potential buyers who are looking to make environmentally conscious decisions that will also save money.

Leave a Reply