Pandemic is Changing Lifestyle and the Demand for Real Estate
The global health crisis has had an enormous impact on all types of real estate, especially the US housing market. After being sequestered for months, with many people working from home and doing their shopping and schooling online, households are reevaluating their current accommodations.
The lockdown has inspired people to seek housing with more space with less density. Working from home has also changed people's housing needs. It increased the need for a home office and it also freed people up to relocate. In many cases employees do not need to live near the offices anymore. Some have moved to the suburbs and other have located to entirely different cities.
The accelerated changed in housing needs together with record low interest rates has pushed US new home sales to their highest level since 2007 and the housing changes are impacting every real estate type. For example, each home sale creates over $5,000 in retail sales, as people remodel, furnish their home and purchase new necessities.
Apartments have seen the impact already. The second quarter average suburban apartment vacancy rate has moved below the average downtown vacancy rate for the first time on record. More people are choosing to live in the suburbs and want additional space for a home office. Suburban apartments will out preform urban maintaining a lower vacancy.
The relocations to the suburbs have also been a boost for self-storage sector. Approximately 1/3 of the self-storage renters are non-business which comes from people changing residences.
The office sector is quickly adapting as well. Companies are leasing office space in new cities and suburban areas to recruit and retain key personnel. Amazon announced it will open offices in “tech hub cities” bringing more than 3,500 jobs with 500 additional tech and corporate jobs in Denver.
Properties like suburban office, suburban neighborhood and community retail centers could benefit from the population shift. This activity ripples into local warehouse demand where there has been a substantial increase in online commerce.
For investors, this paradigm shift comes with a new range of opportunities. The migration will support the performance of real estate in a variety of markets and temporally soften the local performance in others, especially in the urban core.
At the same time, contrarian investment opportunities in high density urban centers, that people are currently moving from, could emerge allowing investors to position for a post pandemic recovery in the urban core.
Many investors are still on the sidelines waiting for market clarity to emerge and waiting for the vaccine that will eventually come. Some are waiting for a wave of distress real estate to come to market in the next 9 to 18 months: comparing today to the early 1990s and the Global Financial Crisis of 2008.
While those investors are waiting other investors reinventing their strategy to capitalize on the emerging trends and the exceptionally low interest rates. This is a different market today. The underlying fundamentals are strong. There is money available for borrowing and Interest rates are at an all time low.
The spread between investment grade cap rates and the interest rate on the 10-year Treasury are at their second widest spread on record. This yield premium represents a unique situation and opportunities for investors.
There is a lot of uncertainty especially over the short term but looking forward the drivers that underpin real estate demand remain sound.
Now, there are opportunities that were sparked by the health crisis and many investors are getting in position to capitalize on them.