January’s wildfires in Los Angeles have displaced tens of thousands of people and caused billions of dollars in property damage. As the area starts the long and arduous task of rebuilding, significant ripple effects lie ahead.

Extreme weather events are growing bigger and more frequent, and yet the impact of the wildfires, particularly the Eaton and Palisades fires, is staggering. “The first thing you have to look at is the scale of the loss,” said development consultant David Greensfelder. “Both of these communities were literally wiped off the map,” the founder and managing principal of Greensfelder Real Estate Strategy noted. According to the California Department of Forestry and Fire Protection, the Eaton, Palisades and Hurst fires burned more than 40,000 acres and destroyed over 15,400 structures.

The Palisades fire decimated the Pacific Palisades community and also impacted parts of Malibu. The Eaton fire caused significant destruction in Altadena, which is located north of Pasadena. Altadena has more of a traditional street grid, whereas Pacific Palisades is known for its topography and hillside homes along and near the coast.

It’s not just property damage but rather that the entire ecosystem in these areas has been disrupted, said NewMark Merrill Cos. president and CEO Sandy Sigal. People have been displaced from homes, schools and churches, he said. The businesses and workers in those communities also have been impacted. The restaurant owner, the cleaning person, the attorney all have been disrupted. Some retail landlords lost property, and retailers saw demand wiped out because customers are gone, he added. None of NewMark Merrill’s properties in the vicinity were directly impacted by the wildfires.

High Cost of Rebuilding

As attention shifts to recovery and rebuilding, many questions relate to the process, the timeline and the cost. Although it’s difficult to define the magnitude of the financial loss and replacement cost of property, Morningstar DBRS estimates that the insured losses from the Los Angeles area wildfires could reach more than $30 billion.

“The top of the pyramid is: What’s it going to take to build this stuff back, and how do we do it? And it’s going to be very challenging and very expensive,” said John Chang, senior vice president and national director of research services at Marcus & Millichap Real Estate Investment Services. “The estimates in terms of total damages may evolve into the most expensive natural disaster in the history of the country, surpassing Katrina,” he said.

One wild card will be the inflationary pressure on construction costs, including both labor and materials. National data from the Associated General Contractors of America showed that input costs, based on the Producer Price Index, and construction bids have stabilized in recent months while labor costs are trending higher. Construction labor was a big problem even prior to the wildfires. The three concerns that topped results in the AGC/Sage 2025 Hiring and Business Outlook Survey were rising labor costs, labor availability and worker quality.

Although the PPI shows minimal changes in construction materials costs in 2024, momentum has been shifting in recent weeks, cautioned AGC chief economist Ken Simonson. Data shows upward movement in the cost for certain materials, including copper and crude oil prices. “There also is much more uncertainty around costs with the election and the messages that President Trump has been putting out,” he said.

Potential policy moves on tariffs and immigration and deportation could have a significant impact on both cost and availability of materials and labor. One of the big unknowns is how other countries respond to U.S. tariffs, which could impact costs and the ability to source goods if other countries also put quotas on the amount of goods they ship to the U.S.

Long Road to Recovery

There’s no question that rebuilding will be a huge lift. It could take months to complete cleanup alone, which likely will include removal of hazardous material and environmental remediation. Inevitably, policy discussions will happen around potential changes to local building codes to improve fire resiliency. People will need to find architects and contractors, and eventually, local building departments will be swamped with a mass of permit applications. “When you lay all of that end-to-end, the first person to move back in, even in a lightning-fast scenario, is north of two years,” said Greensfelder.

The future also is uncertain for landlords, retailers and businesses that serve the impacted areas and depend on the rooftops that are no longer there. If their properties were damaged or destroyed, do they repair or rebuild when their customer base has been so severely disrupted? If they rebuild, what does that timeline look like? And what happens to the shopping center or retail store that didn’t burn down but whose customers are gone?

Some people won’t come back because it’s just not practical. They’ve got to move on with their lives, and they’re going to go replace their homes with their insurance proceeds somewhere else, noted Greensfelder. “Even five years from now, these communities are still going to be feeling the impacts of the fire acutely,” he said.

Key Issues at the Forefront

The wildfires will force state and local government to address policy issues on health and safety related to fire risk prevention and response, insurance, affordable housing and changes to building requirements.

The wildfires have put insurance coverage in the spotlight, as prior to this month’s fires, some insurance companies had looked to reduce their exposure to fire. Some don’t believe they’re able to charge the premiums that the risk dictates. “I think that there’s going to be restraint on the part of investors in the short term until there’s clarity on how the insurance issue is going to play out,” said Chang. People will come up with solutions, but it will take some time to figure out and there will be an element of public policy woven into it, he added.

Another issue is the environmental impact and the risk of exposure to poor air quality and hazardous materials that people will face during cleanup. “We all know all these years later the impact that 9/11 had on the people who were involved in the cleanup of Manhattan,” said Sigal.

Investors Wait for Dust to Settle

As past natural disasters have shown, impacted areas do rebuild and recover and there is an opportunity to build back better and put more risk mitigation measures in place. “A lot of it’s going to depend on the public policy and the willingness of the people in the city to say ‘We don't want to do this again, so how do we make it better? What’s it going to cost?’ and figure out how to pay for it because it’s going to be expensive,” said Chang.

Los Angeles has a fundamentally a strong economy, and the vacancy rates on commercial real estate other than office are historically very low there and property values are very high. The retail vacancy rates for the metro averaged 6.2% in the fourth quarter, while the Burbank/Glendale/Pasadena market had a lower average, of 5%, according to Marcus & Millichap.

Despite significant challenges, there will be opportunity for investors, as well as a need for public-private partnerships in the rebuilding. “I can only imagine that once all of the dust settles, the property values will go up because everything is going to be fresh and new and hopefully fire resistant,” said Chang. The Pacific Palisades, in particular, has been home to a very affluent customer base, so the area could be an attractive investment for retail, he added.

However, private capital likely will reinvest in the impacted areas cautiously. “If you took a poll of investors right now and said ‘Would you go into L.A. right now?’ the answer would be no because there’s too much uncertainty,” said Chang. “Once we get more clarity, then investors can make a calculated assessment on return relative to their risk.”