5 min read
The opinions expressed by the entrepreneur's contributors are their own.
The pandemic affects certain real estate areas differently.
Residential homes have remained stable throughout 2020. However, commercial real estate (CRE) has been hit hard as the lockdown has forced offices and shops to close. Americans, however, have a silver lining that is changing their shopping behavior: online selling and work-from-home (WFH) offer lucrative opportunities for cold stores, distribution centers and remote work areas.
We examine how the historic downturn and new health protocols are affecting renters, landlords and developers.
Living remains robust
Many tenants are struggling, but residential property owners are seeing a surge in assets.
According to the US Census Bureau, 30 to 40 million Americans may face an eviction. According to Upwork's October 2020 study, up to 23 million workers intend to move away from big cities and move to cheaper places.
Despite these trends, the housing market remains robust due to low mortgage rates and oversupply. The current seller market also means that homeowners are likely to receive multiple bids when selling.
In September, existing home sales rose to 6.5 million nationwide for the fourth straight month. According to the National Association of Realtors (NAR), that's a 9.4 percent increase from August and a 21 percent increase from last year. The average price was $ 311,800, or 15 percent more than September 2019.
Related: 3 Reasons To Invest In Real Estate Now
Commercial real estate took a nosedive
According to Nareit, an industry association, the U.S. commercial real estate (CRE) market was valued at $ 16 trillion in 2018. It is undergoing a structural change.
I recently spoke to industry veteran Paul Daneshrad about the impact of the pandemic on the CRE. “It typically takes 6 to 9 months for the commercial real estate market to experience the negative effects of an economic downturn,” said the CEO and founder of StarPoint Properties, a Beverly Hills, California-based real estate investment firm.
“CRE usually stays stable in the early stages of a recession. But during Covid-19, the ramifications were felt immediately, with offices closed, travel suspended and governments ordered housing. "
Office, retail and hospitality transactions declined in just three of the last seven recessions, according to Daneshrad. The pandemic is obviously different: just visit a mall or hotel.
An increase in economic growth in the third quarter is a good sign for the segment. The gross domestic product (GDP) rose from July to September by 33 percent on an annual basis. This is based on data from the U.S. Department of Commerce from October 2020. Because the stores are gradually reopening.
Facilities that live up to the new normal are seeing strong demand
Forty-five percent of leading real estate professionals and investors expect the value of CRE assets to fall between 5 and 10 percent this year, according to an October 2020 survey by valuation firm Duff & Phelps. However, over 90 percent of those surveyed also believe that transaction levels could return to pre-pandemic levels in 2021. And 36 percent believe that the industrial and logistics sector will emerge the strongest from the crisis.
Related: Mortgage rates have hit historic lows. Learn how to invest …
“Data centers, cold stores and industrial manufacturing are winners until 2021,” says Daneshrad.
Cold rooms are temperature controlled warehouses that keep food cold. Investors find them attractive due to the new security aspects, last-mile delivery options and the age of the existing infrastructure. Cold stores are also rarely available, with a national vacancy rate of 10 percent, and that was before Covid-19. They enable companies to improve delivery times and ensure food safety.
Major changes in consumer behavior include ecommerce, hyperlocal delivery, work-from-home, and new health protocols. In September, online sales rose 43 percent year over year (to $ 60.4 billion), according to Adobe Analytics.
WFH is leading to a tectonic shift in office demand.
What remote workers gain in convenience, landlords lose to tenants. A September 2020 report by Cushman & Wakefield predicts the U.S. office sector will lose 145 million square feet in 2020 and 2021. This is due to a 1.7 million decrease in local office jobs.
"Tenants' uncertainty about the profitability of central offices, as well as the large shift towards teleworking, are causing a sharp drop in demand for office space," says Daneshrad.
“Covid-19 has the potential to transform the CRE office space in the long term as companies realize cost savings by working remotely. However, companies returning to the office will expand their premises to allow employees to maintain social distance. "
A business cycle affects industry differently.
A McKinsey study some time ago found that during a recession, some sectors contracted faster than others. For example, a downturn is indicated by a decline in consumer spending, which accounts for 70 percent of the economy. In contrast, the energy industry is one of the last to be affected. (Shoppers can stop buying shoes, but they still need to pump gas.) When consumers and IT recovered, McKinsey's authors said they were beginning to show signs of improvement.
The effects of Covid-19 on real estate are extremely interesting. Because there are structural changes in the way Americans study, work, and buy groceries. Investors, developers and tenants have to adapt to a permanently different landscape.
Related: Trends That Will Be Visible In Real Estate After COVID-19