Wildfires impact LA real estate market, says expert

The devastating wildfires in Los Angeles County have profoundly affected the commercial real estate market, including office buildings, hotels and industrial properties, according to a business expert.

Wang Lei, executive vice-president of strategic management and operations at Gemdale USA, a real estate investment and development company, told China Daily that the fallout extends far beyond immediate physical damage, influencing insurance costs, tenant behavior, regulatory landscapes and investor confidence.

"The biggest potential impact is on investor confidence and insurance availability, which could fundamentally reshape the market," Wang said.

The physical destruction caused by the wildfires, which broke out on Jan 7, is extensive.

CoreLogic, a property data and analytics provider, estimates that the Eaton and Palisades fires alone have resulted in property damages between $35 billion and $45 billion. Approximately 1.1 million square meters of commercial real estate is at risk, including multifamily units, retail space and office buildings.

Experts believe the already expensive Los Angeles housing market is likely to face even greater price hikes in the aftermath of the wildfires that continue to ravage the county.

"Los Angeles is already the least affordable housing market in the country. People making near the local median income are being priced out, and that trend will worsen unless we see an acceleration in new construction," Daryl Fairweather, chief economist of the US real estate service provider Redfin, told Newsweek magazine.

However, reconstruction in affected areas is "particularly challenging", according to Wang. "Stricter fire-resistant building requirements and rising construction costs will further delay projects," he said.

Meanwhile, the fires have caused structural damage to office buildings, leading to a reduced supply of leasable space.

"Some hotels and resorts in scenic but high-risk areas have had to close due to safety concerns, and industrial facilities, including warehouses and manufacturing plants, have experienced operational disruptions," Wang said.

Insurance problem

Insurance premiums for properties in high-risk areas have reportedly surged as insurers reassess their exposure to wildfire risks. In some cases, companies have declined to renew policies, leaving property owners with fewer options for adequate coverage. As a result, many have turned to the California FAIR Plan, a last-resort insurance program that provides limited coverage compared with traditional policies.

"This directly impacts property values and profitability," Wang explained.

The wildfires have prompted businesses to reconsider leasing properties in high-risk areas. Office tenants may opt for hybrid work models or relocate to safer regions, while tourism-dependent hospitality sectors face declining occupancy rates, Wang said.

"Industrial tenants are now favoring warehouses and logistics centers in low-risk areas, which could disrupt the existing industrial market," Wang added.

Regulatory challenges compound the issues. New building codes mandate fire-resistant materials and designs, increasing construction costs for new projects and renovations.

"These regulations aim to enhance safety but make construction and renovations in wildfire-prone areas significantly more expensive and time-consuming," Wang said.

The heightened perception of risk has negatively impacted investor sentiment. This has resulted in reduced capital flows into high-risk areas and a decline in property values, even in regions that were not directly affected by the wildfires, according to Wang.

"Investor confidence in Southern California's wildfire zones is one of the biggest challenges," Wang continued. "It's not just about the immediate damage but the long-term willingness of insurers and investors to engage in these markets."

renali@chinadailyusa.com