For better or worse, we are addicted to growth. Our financial system that is heavily based on rising debt, virtually requires perpetual growth. When businesses shrink, bad things happen. Not only do people lose their jobs, businesses face problems meeting their debt obligations. If they shrink too much, then really bad things happen.
When governments create conditions that are intended to help workers, they sometimes have unintended consequences.
I’ve had the experience of managing employees and contractors in France which is one of the most difficult labour markets that I’m aware of. Every enterprise over 50 employees must have a union by law. On of the consequences of an overly regulated labour environment is that it’s very difficult for workers to find a job, because the liability associated with hiring someone often outweighs the benefits. Employers are very reluctant to hire in that environment. What was supposed to help workers, in fact has the unintended opposite effect.
The State of California took the unprecedented step of requiring companies that hire contract workers to convert them into employees if they work for more than a specified period of time. AB-5, which went into effect Jan. 1, requires companies to reclassify a wide category of California contract workers as employees.
A relatively new California company called Wonolo specializes in connecting workers and businesses. So far they have over 300,000 people working on their platform. Last month Wonolo secured an additional $35M investment from Bain Capital. At the same time, a couple of weeks ago, the company also announced that as of March 1, they would no longer allow businesses based in California to use their platform. This decision will affect tens of thousands of workers who currently use the Wonolo platform in California.
The gig economy has all kinds of contract workers spanning everything from Uber, to drivers for Fedex and UPS. Their customers include all kinds of businesses from Coca-Cola, to Six Flags to Papa-Johns Pizza.
Th company took the decision in order to protect businesses from any unnecessary risks associated with the new legislation. Wonolo doesn’t have the time or the resources to police compliance with the new AB-5 regulations.
So what does temporary contract work have to do with a healthy thriving economy?
So what does this have to do with real estate?
One thing that drives demand for real estate is jobs! Jobs, jobs, jobs. If employment is falling, if it’s too hard to do business in a particular area, then jobs are one of the first casualties. After that then comes real estate as the second casualty.
California legislators may finally get their wish, more affordable real estate. What that means is that prices will fall as more and more people exit the state. The problem is, the ones who are leaving California are precisely the ones that the state really needs to keep. The one’s who stay will be the least mobile lowest earning members of the population. Those who don’t pay taxes don’t really care that California’s taxes are high. It doesn’t affect them.
The folks at Zillow have a nationwide view of real estate. In their latest survey of real estate sentiment, they are predicting that the San Francisco Bay Area will be the worst performing of all real estate markets in the nation.
Of the survey’s markets most likely to underperform in 2020, six are in California and include Los Angeles, Sacramento, San Francisco, San Jose, San Diego and Riverside.
The lyrics in the song Hotel California by the Eagles say “You can check out any time you like, but you can’t ever leave”. I suspect that California legislators have been listening to that song for far too long, because it’s actually not true.