Can CEQA Reforms Help Reverse Capital Flight from California?

By  Derek Wyatt, Managing Director; Jordan LaMarche, Vice President; Evan Farrar, Senior Associate

Over the past several years, investors have increasingly pulled back from California, where even straightforward infill projects face long timelines, unpredictable outcomes, and escalating costs. In response, some developers have considered expanding to new markets in search of more favorable risk-adjusted returns—Cityview, a Los Angeles-based investor and developer, recently tapped RCLCO to lead a data-driven analysis of 55 different markets to identify high-potential expansion targets. Through this work, we have become increasingly aware of a central paradox facing California: the state is the fourth-largest economy in the world, and at the same time, it loses hundreds of thousands of residents each year to other states. Despite strong fundamentals and housing demand drivers, excessive oversight—especially within the entitlement process—has created an environment where residential development is too risky to pursue.

New reforms signal that state leadership is willing to tackle the most entrenched and politically sensitive barriers to housing production.

Policymakers have started to tackle key drivers of entitlement risk across the state, even those that were once thought politically untouchable. On June 29, Governor Gavin Newsom signed two bipartisan bills, AB 130 and SB 131, as part of California’s budget update. The bills represent the largest statewide overhaul to environmental review in decades.

Together, these bills provide new exemptions to review under the California Environmental Quality Act (CEQA) for housing and infrastructure projects in California cities. AB 130 creates a new, “clean” CEQA exemption for qualifying infill housing projects that are consistent with local plans and zoning, along with a 60-day maximum approval timeline to prevent delays. SB 131 provides limited CEQA review for near-eligible projects and expands exemptions to other priority uses.

These bills draw from a deep pool of research that shows how CEQA introduces significant uncertainty and delay to the entitlement process for infill apartment development.

• A study by Holland & Knight of CEQA lawsuits filed between 2010 and 2012 found that most litigation targets infill projects, not greenfield development.
• A 2016 statewide review of CEQA documents conducted by the Legislative Analyst’s Office found that housing projects requiring a full environmental impact report (EIR) took 2.5 years to gain approval on average.
• Other impacts are difficult to quantify, but certainly real: developers will make concessions to potential litigants to avoid delay, and the 2.5-year average represents projects that eventually gain approval, not including the projects that succumb entirely to delay or litigation, or the threat thereof.

Another clear sign of CEQA’s burden on infill housing projects is how eager developers are to structure their projects to avoid it, when they have the chance.

• In Los Angeles, over half of all housing units proposed between 2019 and 2022 were part of either Transit-Oriented Communities (TOC) projects or Density Bonus projects, many of which are ministerial and therefore not subject to CEQA review.
• The immediate developer response to Executive Directive 1 (ED1)—which offered a new ministerial pathway for 100% affordable housing in Los Angeles, even with custom, “off-menu” incentives—further underscores how important avoiding CEQA has become to limiting entitlement risk and protecting margins.

AB 130 and SB 131 have the potential to move the needle for infill housing development across California cities.

Streamlining approvals reduces the entitlement risk and uncertainty that have characterized development in California cities.

Most immediately, the new statutory exemptions will streamline the approvals process for infill projects that already comply with local land use regulations, exactly the kind of projects that often experience delays despite their alignment with existing policy. The addition of a 60-day “shot clock” is also massively important: in Los Angeles and San Francisco, where projects regularly take years to gain approval, this new timeline is truly a fundamental shift in predictability and pace.

Departure from the state’s longstanding “value capture” paradigm is meaningful for developers grappling with thin margins in high-cost markets, where added requirements often make otherwise viable projects infeasible.

Historically, both state and local incentive programs—such as the Density Bonus Law, TOC, and SB 35—have offered regulatory relief only in exchange for delivering affordable housing or providing other public benefits. These programs play an important role in unlocking housing development, but they also reinforce the idea that entitlement certainty is something to be earned rather than something that projects meeting existing plans and policies ought to receive at a minimum. AB 130 challenges that premise by creating a clean exemption from CEQA for qualifying projects—without requiring additional concessions like below-market units.

For developers and their capital partners, this shift could drive renewed interest in ground-up residential development opportunities in California cities.

By reducing entitlement risk and streamlining approvals for a broader set of infill projects, AB 130 and SB 131 may shift the underwriting landscape just enough to drive compelling risk-adjusted returns, with hopefully more complementary reforms on the horizon. This shift in urgency and priorities at the state level also has the potential to ripple through future policy discussions around other hot-button topics, such as the merits of transfer tax reform or coastal zone restrictions.