New California law could mean problems for industrial REITs

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California is one of the largest global markets for shipping, with thousands of ships entering its ports each year and setting off a distribution chain around the United States. New regulations could slow the growth of California's fast-growing warehousing business, while also impacting several industrial real estate investment trusts (REITs).

The Port of Long Beach handles over $200 billion worth of cargo each year, making it the ninth largest shipping market in the world along with the Port of Los Angeles. Much of the cargo from these ships is trucked to distribution centers in Southern California, particularly in an area known as the Inland Empire.

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Assembly Bill 98, which passed the California Assembly, would not only change building codes for warehouses but also alter distribution channels. It would ban heavy diesel trucks from operating near residential areas, schools and nursing homes. Eloise Gómez Reyes, a Colton Democrat who co-sponsored the bill, said the restrictions in the bill are minimal and cities may need to implement stricter regulations. She said the bill “brings forward common-sense measures that balance public health and economic issues in a way that supports affected residents in the Inland Empire and across California.”

The bill would require new warehouses in industrial areas to be set 300 feet apart. In other locations, the setback would be 500 feet. Some advocacy groups say the bill does not do enough to protect communities. Ana Gonzalez, executive director of the Jurupa Valley-based Center for Community Action and Environmental Justice, told the San Bernardino Sun that 1,000 feet of space must be maintained between warehouses and sensitive areas. “The bill does not go far enough on the setback requirements and leaves loopholes in some language for 21st century warehousing,” she wrote in an emailed statement.

The bill has drawn protests from local governments and business groups who argue it would hurt the economy by slowing warehouse development, reducing commerce and potentially costing jobs. Mayors from Chino, Chino Hills, Corona, Fontana, Montclair, Ontario, Rialto and Upland have signed a letter opposing the bill. The groups are stepping up their efforts against the bill as California Governor Gavin Newsom has until the end of September to either sign or veto the bill.

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How big could the business impact be?

Some city officials fear the new regulations could force companies in the warehousing industry to look elsewhere. “In densely populated regions, these restrictions could make it nearly impossible to find suitable locations for new or expanded logistics facilities,” said Mayor L. Dennis Michael of Rancho Cucamonga. “This not only hampers new development, but also forces existing facilities to consider relocating to another state.”

Amazon has announced it will close two warehouses in the state, costing over 300 jobs. While it's not clear if this is related to the potential new law, the possibility of similar actions is one reason why cities are opposing the bill.

Several leading industrial REITs have a strong presence in Southern California. Rexford Industrial Realty (NYSE:REXR) is investing in warehouse development in Los Angeles and Orange County. The company currently owns 422 properties and is actively acquiring warehouses in the region. Other industrial REITs, including Terreno Realty (NYSE:TRNO) and the largest REIT of all, Prologis (NYSE:PLD), have a strong presence in the Inland Empire.

As active buyers and builders of industrial warehouses and distribution centers, these REITs will be watching closely as developments unfold. The bill could also impact many e-commerce giants, including Amazon and Walmart. If Newsom signs the bill, the new rules would take effect in early 2025.

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This article, “New California Law Could Cause Problems for Industrial REITs,” originally appeared on Benzinga.com