In our last post, we talked about how the massive and possibly permanent California drought came to be. The issue of water distribution, which has been a point of controversy since the first Spanish settlers came to the state, has reached the highest levels as people see that something needs to change. It’s California’s oldest issue about its most elemental factor, which is what makes it interesting that the savior for the real estate market will be California’s newest inhabitant: the tech sector.
The Economic Impact of the Drought
In no way whatsoever do we want to minimize the human or climatic impact of the drought. It’s that kind of short-sighted thinking that got us into trouble in the first place, after all. But there are some good signs for people in the real estate industry. For one thing, the economy is not going to collapse.
You’ll read some panicked news reports taking broad data and trying to paint a misleading picture. It makes sense. We’re in a dangerous situation and people tend to naturally exaggerate danger. It’s also good for page views, of course. However, people less inclined for clickbait disagree with this level of panic. A report out of the capital downplays the economic impact of the drought, broadly speaking. It notes that agriculture, which will be the sector most immediately and deeply affected by the water shortage, only accounts for 2% of the economy. Various industries will have to cut back and it will be very important for residences to curtail water use and to conserve, but for the most part, non-agriculture residents won’t be tremendously impacted in the short- or medium-term.
For real estate investors and those looking for a hard money loan in order to take advantage of a shifting situation, this means that there isn’t a need for panic. The real estate industry might change a little bit, but smart investors and builders will know what that means and will be able to adapt.
Los Angeles, the California Real Estate Market, and the Drought
One could forgive the irony when talking positively about Los Angeles during a drought. After all, this is a city that was built on the concept of taking water from literally everywhere else, and it has done its share of changing the water supply in several states (see Chinatown for more information). The area also has a reputation for building insane houses in the desert, lawns in a sea of sand. That said, Los Angeles is changing. The city has started an important grey water project and is becoming more serious about conservation overall. The city of endless growth is finally adapting to the idea of slowing that growth.
In this context, “slowing growth” only means a shift away from building in unsustainable places. It doesn’t mean people aren’t moving into the area. Los Angeles is actually seeing a huge population growth, mostly thanks to its growing tech sector.
In the 1960s and 1970s, Southern California was the heart of tech: computers, microchips, aeronautics, and the like. Obviously it was eventually surpassed by the Bay Area, which harnessed the power of internet money. And while that hasn’t changed back entirely, the two regions are beginning to reach equilibrium.
For example, Yahoo is moving to a huge base to Playa Vista, and that’s just the latest sign. It’s part of a growing movement as more and more tech workers and companies move in, leading this region to be dubbed “Silicon Valley South.” Money is moving in as tech workers, who are less geographically tied down than other workers, can move wherever. Despite the drought, Southern California is looking very appealing.
What this means for real estate investors is that homes and apartments that once were in lower-income areas have the potential to see the same kind of growth that has seen Silicon Valley real estate explode. A smart investor will try to take advantage of this by getting a hard money loan to improve property in anticipation of a new wave of gentrifiers.
So what does this have to do with the drought? As water rights for agriculture begin to be re-evaluated, the state will look to invest even more in the areas of its economy that keep it afloat and don’t use as much water. That’s the tech industry, mostly. Knowing where it is moving can give you a huge leg up on your real estate plans.
A sharp article by Eric Blair argues that new technology can help to mitigate and reverse some of the symptoms of the drought. That may or may not be true. But for real estate investors, the power of the tech sector and its spread across all parts of California can make the economic desert bloom.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.