By Jake LevinThe mantra in investing has always been, buy low and sell high. And this idea has not changed when thinking about investing in real estate after Covid.
It should continue to be applied to all your investment properties.
Just like in the money market, your return on investment directly correlates to the degree of risk. On the risk/reward matrix, value-added investments tend to yield the greatest financial rewards. On the other hand, risk-averse investments tend to provide a guaranteed reliable but modest return.
Smart investments aim to maximize certainty and earnings simultaneously.
In this article you’ll find, three smart real estate investments categories for investing in real estate after Covid.
Out of these three, two were historically underperforming due to Covid, but they offer exceptional upside for gains from real estate after Covid normalizes. It may be safe to assume they are undervalued in today’s market, but it is unclear when a rebound will occur. The third option proved to be an evergreen during the pandemic and will likely continue to prosper after the pandemic.
1. Multifamily Real Estate After Covid
Multifamily real estate stayed afloat during the height of Covid because the need for shelter was inelastic, meaning people still needed a place to live despite the pandemic and there wasn’t much change to the demand for rentals. Although, that varied by submarket.
In the hierarchy of importance, shelter takes precedent.
During economic downturns, many people prioritized rent to ensure they have safe housing. While multifamily properties suffered some vacancies in certain submarkets, they did not face the same perils as other sectors. Along with single-family properties, they remained workhorses of the commercial real estate industry.
Multifamily properties are widely considered to be “recession-proof” and real estate after Covid and during the height of the pandemic were put to the test.
Multifamily offerings tend to offer more competitive rents than single-family rentals. Additionally, many also include utilities such as electricity, gas, parking, and laundry. These are all important factors to consider for renters when a recession occurs.
With great flexibility to provide value-add opportunities, multifamily investments consistently provide owners with income and a higher return on investment down the road. In the best of times and the worst of times, these buildings create wealth.
As a result, multifamily real estate became one of the most resilient factions of investment real estate during the economic crisis.
Many people migrated out of bigger cities and into more spread-out suburban areas to work from home. We saw a significant shift towards garden-style communities that offered more opportunities for social distancing with open space, lower density, and outdoor access.
The rent for this type of multifamily property is usually lower than its high-rise counterparts, which was crucial for renters during the pandemic.
With Covid predicted to be normalizing for the U.S. in early 2022, multifamily investments will continue to prove to be one of the smartest investments in real estate after Covid.
You will reap the combined benefit of some people remaining in garden-style communities outside the city and others returning to urban apartment living. According to Forbes, in the last decade, commercial real estate saw the creation and growth of “suburban downtown”.
Thanks to the demand for urban renewal cities have seen “Higher-density, mixed-use real estate developments, have paired residential housing with offices, grocery store-anchored shopping centers, and experiential retail, such as restaurants, bars, small event venues, and playgrounds. For a generation who enjoyed city living and wants similar amenities, but in a family-friendly format and at a more affordable price point with more space to isolate if it’s ever necessary again, the demand for this new hybrid suburban life inevitably will increase” – Forbes.
2. Office Properties
Office Properties were perhaps the hardest hit by the pandemic.
As a precaution at the start, many employers sent their employees to work from home indefinitely. While some employees have returned to working in the office, many employees are still working from home. The trend of working remotely could further transform office occupancy and building sales in real estate after Covid.
The pandemic has arguably proven that employees can effectively work from home, allowing for a richer work-life balance. While many employees have enjoyed the opportunity to work from home others prefer a hybrid or office environment.
As a result, office real estate after Covid is expected to recover; however, the timeline for that full recovery is still somewhat uncertain.
Lower office occupancy at present may provide you with a unique opportunity to purchase office properties at well below typical market value, with a great deal of confidence that you will receive a substantial return on investment as occupancy returns over the mid-to-long term.
For this reason, many office properties at this time could be considered value-add opportunities.
With increased pressure on private industry with greater than 100 employees to require vaccination, we are likely to continue to see the push towards in-person working perhaps sooner rather than later. At this point in the pandemic, the big pharmaceutical companies are fully prepared for the next rollout of booster shots meaning reduced wait times.
The data behind the office vacancy rates confirm this. Around the start of the pandemic, office vacancies were sitting around 13% in the United States. This was up from a mere 9% in Q3 of 2019. By Q2 of 2021, Covid had taken its toll bringing rates of over 17% back to 2008 levels. In the last few months, things have really started to come around. By Q3 of 2021, vacancy rates returned to just 12.4%.
Yet the hesitancy still exists. It is clear that people are to some degree still uncertain about office properties occupancy after Covid. Use this doubt to your advantage and buy low.
3. Retail Properties
Retail properties were another type of real estate impacted by financial burdens during the pandemic.
The shift towards online retail was already reducing the demand for in-person shopping, and the pandemic exacerbated it. As stores reopened shopping malls were underwhelmed with traffic. Experts at IBM say that Covid may have exacerbated the shift toward online shopping by five years or more.
Retail landlords reported higher rates of unpaid rent than other commercial property landlords. This lack of payment was predominantly due to many states shutting down non-essential businesses during the pandemic. In May of 2020, close to 50% of commercial retail rents were not paid to landlords.
Despite these issues, things are looking up. The problem of rent collection persisted for many months, but the retail landscape is rapidly shifting.
By August 2021, retail rent payments are almost back to 2019 levels.
With 95% of tenants now reportedly paying rent, payments have nearly doubled in a little over a year. This bodes extremely well for the future value of retail properties.
Businesses that depend on in-person customers, such as restaurants and gyms, saw a shift to curbside takeout pickup and online fitness programs. However, the rollout of the vaccine alongside pandemic-related online supply chain issues has started to turn this around.
With inoculation came increased confidence to resume in-person retail participation. As people returned to their offices, they were no longer able to wait around at home for time-sensitive deliveries. Additionally, lengthened shipping times and lack of availability have brought people back into stores.
Larger companies have started to give retail a nudge back towards market normalcy. Big tech companies such as Google, Facebook, and Amazon have purchased both office and retail spaces. Giving competitors an incentive to do the same, as these giants often set the standard for the retail industry.
Commercial leases are often large operating expenses, so it may be in the best interest of large corporations to purchase buildings rather than rent them. This gives companies the option to own their own real estate and rent out any unused capacity. With office real estate after Covid trading for below typical market value, large investors right now have the opportunity to make significant returns on investment.
It makes financial sense for companies with a lot of capital such as Facebook or Microsoft to purchase an undervalued office property and profit handsomely when prices return to normal market levels
“Overall, publicly traded U.S. companies own land and buildings valued at $1.64 trillion, according to S&P Global Market Intelligence. That is up 38% from 10 years ago, and the highest for at least the past 10 years, according to S&P” – Wall Street Journal.
With space finite, the continued purchase of land and buildings suggests a lack of supply in the future. Investors may do well to secure an undervalued property while they are able and before Building values return to more typical valuations.
Will real estate bounce back in 2021?
Are you interested in learning more about how multifamily investing has been impacted by the pandemic?
Questions continue to loom about the state of the pandemic entering the fall and winter, leaving many real estate investors to wonder about the outlook for real estate for the rest of 2021.
Check out our recent blog post, 2021 Commercial Real Estate Outlook: Market Trends.
Each segment of the investment real estate sector has its unique challenges. All the investment real estate sectors will face obstacles during the recovery process, and some may experience great change due to new behaviors adopted during the pandemic.
Consider these changes when thinking about your investment strategy. Since there is no clear timeline of when the pandemic will end, it is hard to say what the future holds for each segment of the investment real estate industry.
However, each category discussed displays great promise with projected recovery for real estate after Covid.
Commercial real estate can be one of the most rewarding investments at the present time. And it offers a tangible alternative to the more passive and under-performing money market. If you are interested in additional strategies on how to acquire real estate after Covid, check out our recent blog post for more tips.
