Settlement agreements with departing employees - whether done in the context of a pending lawsuit or a severance package - quite often include the departing employee's promise never to seek to be re-hired. Given that neither side is - at the time - all that happy with the other, this would seem a pretty unremarkable arrangement. A California federal court decision, however, raises questions as to the ultimate enforceability of the promise.
The California state minimum wage increased as of January 1, 2017, with additional annual increases scheduled through January 1, 2023, when the minimum wage for all employees will reach $15.00/hour. California Labor Code § 1182.12; Minimum Wage Order 2017. Until then, employers with 25 or fewer employees are subject to a lower minimum wage requirement than those with more than 25 employees. For example, as of January 1, 2017, the minimum wage for employers with 25 or fewer employees is $10.00/hour, but is $10.50/hour for employers with more than 25 employees.
California's Fair Pay Act (California Labor Code § 1197.5) became effective on January 1, 2017. Briefly, the law prohibits pay differentials as between men and women, as well as among both races and ethnicities, for "substantially similar work." Exceptions are allowed in the context of seniority systems, merit systems, systems measuring the quantity or quality of production, or other "bona fide" factors other than sex, race and ethnicity. In the face of a lawsuit, however, the employer bears the burden of proving the existence of an appropriate exception.
Consistent with what many consider an employment 'best practice,' all manner of employers distribute employee handbooks and have their employees sign a separate, written acknowledgement that they received a copy of the handbook. Most of these handbooks contain clear statements that the employment is 'at-will.' In addition, many of these handbooks contain language requiring that all employment disputes be submitted to arbitration, rather than decided in a court with a jury. In late-2016, the practice of putting the important at-will language and the arbitration requirement in the same document became problematic.
Many California real estate developers have prospered in recent years as major markets like Los Angeles and San Francisco have thrived. Commercial property prices in other gateway cities have also risen sharply since the 2008 financial crisis, and both entrepreneurs and leading executives expect this rapid growth to continue. However, government regulators have raised questions about lax underwriting standards, and the Federal Reserve has once again started to raise interest rates to keep inflation in check and curb risky borrowing.
Rising borrowing costs do not appear to be dampening the enthusiasm of the business leaders. The Federal Reserve announced the third interest rate hike in four months on March 15, and economic experts expect at least two more increases before the year ends. The business community generally reacts to such news with caution, but a Business Roundtable poll of 100 leading CEOs reveals that enthusiasm remains extremely high. Another survey from the National Federation of Independent Business suggests that small business owners are just as bullish.
A shortage of available office and retail space is impacting prices in several California markets, and rents in areas like Pasadena have increased by as much as 25 percent over the last 12 months as a result. Much has been written by industry experts in recent years about the struggling and sluggish retail sector, but brokers report that vacant stores in Pasadena are rarely available for long. The vacancy rate for Class A office space in the city sits at 12 percent, but a lack of new construction has caused Class B and Class C vacancies to fall to just 6 percent.
Major commercial construction projects can take years to complete, and most observers believe that vacancy rates in Pasadena will continue to fall during the next few years. Local business leaders have worked closely with city planners to ensure that Pasadena remains an attractive destination for visitors and investors alike, and this may explain why the city's retailers have bucked national trends and continue to fare well.
According to reports, in December 2016, the Federal Open Market Committee voted to raise interest rates 25 basis points and plans to raise rates three more times during 2017. While the market had been expecting the increase, many commercial real estate investors have concerns that the change may bring about a negative impact on the commercial real estate market. However, these fears may be unfounded.
While interest rates should not be ignored, the real concern people should have is over the condition of the economy because interest rates are artificial. In fact, whenever interest rates are normalized, it is typically because the Fed believes the US economic recovery is strong enough to handle the hike without the false support of low rates. This factor should encourage property owners and commercial real estate investors as a thriving economy is what investors rely on despite rising rates. A strong economy spurs jobs, produces higher wages and brings in more cash to investors via higher sales prices and rents. It is also interesting to note that, prior to the rate hike in December, the last time the Fed raised the rate was back in 2006.
California investors may be interested to know that the Southeast region of the U.S. is experiencing an unprecedented economic boom. This has led to a record number of real estate closings for developers in the region, according to industry insiders.
The Southeast, which comprises the area between the Appalachian Mountains and the Gulf of Mexico, now makes up the world's sixth largest economy, according to real estate market experts. The boom is led by the large metropolises of Atlanta and Miami, but the entire region, including Charlotte, N.C., Tampa, Fla., and Nashville, Tenn., is experiencing rapid growth.
Commercial real estate developers in California may have read about what banking regulators are saying about the real estate market. After low interest rates caused a spike in CRE loans, banking regulators have become worried that banks are issuing too many of them. The Office of the Comptroller of the Currency has flagged CRE loans as risky, and the U.S. Federal Reserve is putting a greater focus on CRE in this year's stress test.
The Fed introduced its annual stress test along with other financial regulations after the 2008 financial crisis. The stress test requires banks to prove that they could survive a hypothetical scenario in which the economy takes a downturn. If banks cannot pass the stress test, the Fed will require the banks to boost their capital reserves before investors can be paid or new investment plans can move forward.
California commercial real estate developers might wonder what 2017 may bring to the market. There are several factors that experts believe may impact the availability of financing and the market itself during this year.
Interest rates are broadly expected to increase soon. This increase is expected to only be about a quarter of a percent, however, so the increase should not have a dramatic effect on commercial real estate. With thousands of loans scheduled to mature during 2017, borrowers might be led to refinance their loans so that they can lock in interest rates while they are low.