The pandemic has been a catalyst for global change, rapidly accelerating some underlying trends that were already in evidence – even before 2020. It is reasonable to assume that we may never return to the way things were in 2019, but how will the ‘new normal’ affect real estate investment and what opportunities can investors expect to see?
Some key areas for consideration:
- Socioeconomic changes – remote working; increasing mobility; different shopping habits; and senior housing needs
- Impact investing – aimed at achieving beneficial social and economic outcomes
- Changes of focus for commercial real estate investment
- Opportunities for acquiring real estate at attractive prices
1. Socioeconomic changes
The work-from-home movement is a trend that was gaining popularity before 2020 but has, by necessity, seen a massive increase during the pandemic. The ability to work from anywhere will obviously affect the future of office buildings, which must adapt to the needs of a workforce that is mainly or partly remote. Remote working will also lead to smaller cities with more affordable housing increasing in size, with the accompanying need for affordable single-family dwellings. Medical and educational centers in those cities will also need to provide for rapid growth, with the anticipated influx of well-qualified, high-income workers and their families. The move away from standard bricks-and-mortar retail establishments was another trend already well under way; the pandemic simply accelerated it, spurring a huge increase in online shopping and home delivery – even of essential items such as groceries. Affordable senior housing that can provide older citizens with the support they need will also be in demand.
2. The Pandemic Will Impact Investment
The pandemic has precipitated the importance of developing and investing in real estate that has positive social and economic benefits such as:
- health and wellbeing
- increased diversity of age, race and income
- educational access
- environmental benefits, including the ability to cope with, lessen, or avert, natural disasters resulting from climate change
Existing trends that are likely to increase will include migration, both national, and global. No longer needing to commute, people will continue to move away from densely populated city centers. We can also expect to see migration from states – and countries – hard hit by increasingly severe and frequent natural disasters and extreme weather events.
Global climate change has not disappeared; if anything, the pandemic has served to highlight the dramatic impacts that difficult-to-quantify risks, such as natural disasters, hold for real estate investment portfolios. Investors are becoming increasingly aware of the need to integrate climate change and sustainability into their investment decisions.
It is reasonable to assume that new construction will encompass strict codes for sustainability, while access to health care and quality education will continue to be key factors for residential developments. The pandemic has drawn attention to the inequity of race, income, and gender; it is anticipated that newer residential real estate will be designed around communities with increased diversity, particularly in terms of providing a mix of housing with a sufficient number of affordable units, together with ease of access to transit and other essential services.
3. Change of focus for commercial real estate investment
Downward trends will include:
- shopping malls
- individual retail stores
- hospitality venues – hotels, restaurants, and large entertainment centers
Many of the above will have struggled to survive during the pandemic and some may never reopen. For those that do, other socioeconomic changes, such as the proliferation of online shopping, will make them less attractive. A distrust of being in a situation where one shares space with strangers may also linger for some time, with vacationers opting for private rental accommodation over hotels and inns.
Upward trends will include:
- self-storage facilities
- data centers
- mid-range rental units
- medical offices and laboratories
- plants for producing vaccines and other medication
- senior housing
The trend away from traditional retail and towards online shopping has created an urgent need for more warehouse space; warehouses close to major ports will be particularly attractive to investors.
Many of the jobs lost through the pandemic will – sadly – not be returning; families will struggle with rent and mortgage payments and may choose to downsize; many young people have already moved back in with their parents and may stay there longer than they originally planned.
A newly mobile population will require self-storage facilities and access to low- to mid-range rental accommodation, currently in short supply in many cities. There will be increased demand for access to medical care, and we are already seeing the need for labs to support ongoing medical research, along with factories to produce vaccines.
Following the tragic experiences in many long-term care homes, we should also anticipate a rising demand for affordable and comfortable senior housing that allows for independence, access to amenities, and the provision for socializing. Aging in place – with all the necessary support that involves – will be the preferred way forward.
4. Opportunities for acquiring real estate at attractive prices
Predicting the future of the real estate market is far from an exact science. With the onset of the pandemic bringing job losses and business closures, it would have been understandable to assume that house prices would fall. Yet, the opposite is currently happening, with many markets showing considerable gains, resulting from increased mobility due to remote working, coupled with record-low mortgage rates. People who are employed and able to work from home have both the income and the desire for larger properties that accommodate the need for a designated home office space. At present, demand seems to be exceeding supply in many areas.
Whether this trend will continue in the medium to long term is debatable. With increased unemployment, it seems likely that more properties will come on the market, shifting the balance. Unemployed renters may expand demand at the lower end of the rental market but are more likely to encounter financial difficulties. This makes lower-priced rental property riskier for investors, who should stay closer to the middle range. Additionally, there should be many opportunities in commercial real estate for both purchase and redevelopment as many office buildings become under-used, with high vacancy levels.
What does this mean for investors looking at portfolio distribution going forward?
Financial advisors and investment fund managers may recommend that real estate should comprise anywhere from 10 to 50 percent of their clients’ portfolios, with family offices veering towards the higher end of that range while more cautious managers might suggest between 10 and 20 percent. As always, investors hope to find the ‘holy grail’ of minimal risk and predictable high returns, with long leases and high occupancy.
Investors who are not over leveraged should find opportunities in mid-income rental housing. High unemployment will make lower-priced properties less attractive for the investor due to the increased risk of rent and mortgage defaults at the lower end of the market. The ideal investment will be in mid-income, single-family housing. While the private residential housing market has proved – so far – to be remarkedly resilient, other socioeconomic factors at play suggest that this may not last. There will likely be opportunities for those investors who are in a position to move quickly to acquire properties at more attractive prices.
Similar guidelines apply to commercial real estate; high occupancy and long leases, with stable tenants, in areas where growth is already happening are the ideal. Investors should consider commercial property such as medical centers, self-storage facilities, data centers, and warehouses. Unlike residential units, industrial property tends to be relatively low maintenance, an added bonus.