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Political headwinds for real estate in 2023

By Neil Andrew Stein, Esquire, Kaplin, Stewart, Meloff, Reiter & Stein

Both Philadelphia and Montgomery County have traditionally been identified as two of the most “resilient” markets in real estate. According to Redfin, these two areas have the second and third lowest recession risk scores, behind only Akron, Ohio. This score results from a diverse economy, which attracts investors and businesses from across the country and the world. This area is no longer the best-kept secret. Even price increases still result in a less expensive market than other major cities in the northeast corridor.

There are a few headwinds that could derail this trend. However, some subtle obstacles may loom large in the coming year and beyond.

Getting Greener. The recently signed Inflation Reduction Act (IRA) will pressure property owners to make significant investments in reducing carbon emissions and clean energy. The IRA contains multiple incentives to stimulate environmentally friendly building projects to curb overall carbon dioxide emissions. Given the state of the U.S. economy and the return to the office trend gaining momentum, green building development is on track to become a prominent trend in 2023. With financing becoming more expensive and harder to get, developers need to make their projects as cost-effective as possible. The IRA’s tax credits – for carbon sequestration and solar panel installation – can make renovation and ground-up projects financially viable. The new law also supports less capital-intensive green project development measures like using sustainable building materials and connected HVAC systems that use less energy. As inflation is making the entire development process more expensive, embracing eco-friendly policies gives developers a way to regain some control of their budgets. In addition, green building development is gaining more popularity as a strategy to bring remote workers back to the office.

Staying Dry. Planned development and redevelopment may run afoul of a new definition of “waters of the United States” recently implemented by the Environmental Protection Agency and Army Corps of Engineers. Just what is a “wetland” has traditionally been part science and part nonsense. Most of us know a river, stream, lake, or pond when we see one. The Clean Water Act has protected these bodies of water for over half a century. The problem is when the EPA and the Army Corps of Engineers define which less-obvious bodies of water are protected by law in 2015. The EPA established a relatively broad definition of waters of the United States or WOTUS. In 2020, the Trump administration limited the types of waterways that received federal protections, excluding much of the country’s wetlands and smaller waterways. The new definition reinstates similar protections to those that were in place before 2015. These updated standards are, in part, a response to several Supreme Court decisions in cases that challenged past definitions of WOTUS over the last two decades.

To Compete or Not to Compete. While not having a direct link to the real estate industry, employment agreements are common in the real estate industry. Those agreements frequently contain non-compete clauses. Not unlike the recent “gas stove” fiasco that began the year, another federal agency may be planning to delve into another aspect of personal choice. Following the Federal Trade Commission’s January 5, 2023 announcement of its Notice of Proposed Rule Making setting forth a ban on all non-compete clauses between employers and employees, the Notice was published in the Federal Register on January 8, 2023. The sixty-day comment period for this proposed rule ends on March 10, 2023. If the rule is finalized in its current form, the FTC anticipates that it will impact nearly thirty million workers that are subject to these types of restrictive covenants. The FTC also estimates that eliminating non-competes could result in $300 billion in additional wages for these workers. The responses have been extreme on both sides. Some cheer the possible benefit to employees, while others claim the proposed rule would simply be illegal. While the FTC seems to be taking a more “wait and see approach” during the public comment phase, the outcome is far from clear.

Your Air Supply. By now, everyone is familiar with Airbnb. Founded in 2008, it allows people to rent homes, apartments, and rooms to others. In a little more than a decade, Airbnb has morphed into a lodging goliath, offering more than 6 million places to stay in more than 191 countries. Its listings outnumber those of the top six hotel chains combined, helping the company reportedly generate billions in revenue. Operating an online marketplace for short-term homestays and experiences, the company acts as a broker and charges a commission from each booking. However, war has broken out between Airbnb and local governments across the country. Airbnb is often a cheap option for travelers. On the other hand, hotels are subject to costly health, safety, zoning, and tax requirements that do not apply to Airbnb. Recently, Airbnb began striking deals with officials in select cities to collect and deliver taxes from its hosts, referred to as Voluntary Collection Agreements, or VCAs. In exchange, these cities legalize home-sharing arrangements. However, those agreements don’t require hosts to meet other zoning, health, and safety rules, and they prohibit cities from attempting to collect back taxes.

Locally, in April 2019, the Pennsylvania Supreme Court held that municipalities have the authority to prohibit short-term rentals of single-family homes without changing their zoning ordinances. The decision also makes it harder to argue that these types of rentals are consistent with the traditional “single-family dwelling” use, at least if the local zoning ordinance defines “family” in a manner similar to the ordinance addressed by the Supreme Court. While the issue seems to have been decided for now, at least in the courts, undoubtedly, this issue will continue to be debated locally and in state legislatures in 2023 and in years to come.

In conclusion, the real estate industry will need to weather political decisions that transcend the more typical fiscal and monetary decisions made by the Federal Reserve and Congress. The phrase “all politics is local” is commonly used in political circles. While the phrase may be true to a certain extent, federal, state, and local decision-making will all have an effect on the industry in 2023. One can only hope that politicians recognize the economic necessity for a strong real estate industry. Let’s hope.

Neil Andrew Stein, Esquire is a principal of Kaplin, Stewart, Meloff, Reiter & Stein and a member of the Land Use, Zoning & Development Department.

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