Water Rationing The Real Cost to Commercial Real Estate

California commercial and industrial offices have been able to conserve water mostly without severe consequences since 2009 during the drought; however, mandatory water conservation has now been ordered by Governor Brown. It does not seem that anyone is immune from this critical shortage of water; as a result, costs for many commodities will be going up in California.

Governor Brown has drafted mandatory water conservation for all residents and businesses in California on April 1, 2015 to be voted on in early May. The Urban water suppliers such as the Los Angeles Department of Water and Power (DWP) and other water supply companies in California will be mandated to reduce water consumption by 25% compared to water use in 2013.

This means the water suppliers must now report monthly to the State Water Board the use of residential and commercial sector water starting in June 2015 through February 2016. The water usage will be compared to the same time period in 2013. The State water board will assess suppliers’ compliance for both monthly and cumulative water usage reductions.

In the case the water usage has remained the same or increased, the water distribution company will receive a letter ordering them to stop non-compliant activity. After that if they don’t reduce water consumption to their customers, the distributor will be given fines of up to $10,000 per day by the State Water Board.

Beginning June 1, 2009 the water suppliers were asked to support a voluntary 20% reduction in water use. The DWP implemented a mandatory water conservation program to their customers to reduce water consumption by 15%. Residential commercial and industrial businesses that do not reduce their water use pay more for their water and receive higher water bills. Those who do reduce their water consumption by 15% receive lower water bills.

In addition, the DWP implemented Commercial rebate programs such as replacing toilets, landscapes and irrigation nozzles and sensors to reduce water usage for their commercial and industrial customers, and a similar program for residential customers.

A good portion of my career has been dedicated to the industrial side of commercial real estate. Therefore, I am dealing with companies that actually produce a product or a service industry that needs water. If the price of water goes up without reducing other expenses than the price of the service or product must increase. Obviously, this is a fairly simple concept.

Azteca Dye and Laundry based in Downtown Los Angeles is a clothing dye house and wash house for jeans that create stone wash, grinding, distress, tints, pigment, echo dye and other washing and dying techniques for clothing designers.

They are having a difficult time reducing water use mandated by the DWP since water is a big part of their service. As a result, they have been hit with surcharges by the DWP in the past. They have not passed the added expense to their customers yet; however, they are not sure what’s going to happen with the new mandatory conservation being implemented by the State, according to Karina Rueda, the Office Manager. They are waiting to hear from DWP first.

Now how can a company survive with increasing costs and less demand for their products or services? Companies may try to reduce their operating costs such as reducing their rent or the size of their facilities. Azteca has two facilities one in Downtown and another in Compton. Since rents are not easy to reduce because tenants may be locked into long term leases. Subleasing or default on their leases may be unpleasant options for companies. These potential increases in the cost of water may impact commercial real estate negatively and cause prices to decrease.

The scenarios mentioned above are realistic and may have dramatic effects on the value of commercial real estate in California. During the recession, commercial real estate was reduced in value by 20-30% in the Los Angeles basin. Just when the economy in California is starting to expand again after the recession, we are faced with circumstances that may drag down the real estate market.

The City of Los Angeles was once the motion picture capital of the world until municipalities withdrew incentives to this industry and raised City and State taxes. The film industry dealt with this issue by moving out of the State and in some circumstances out of the country.

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