A 7-Part Series on What Experts Predict for Real Estate in 2021 – Part 3
Part 3— Unintended Consequences and Societal Impacts Due to COVID
To understand what the real estate industry experts’ crystal ball for 2021 may predict, a strategy discussion was held with some of the most experienced and knowledgeable real estate experts. The cerebral panel covered topics such as capital markets, the economy, construction costs, development trends, effects of COVID, regulatory matters, and much more.
This article is the 3rd in a series of 7, broken into bite-size topics, related to the all-important question of … “given the current landscape and forecasted trends related to the economic, political, banking, healthcare, and real estate sectors, many real estate investor are asking the question should they be leaning into these headwinds, or should they be retreating to the sidelines?”
Part 1 of the Series suggests that now is the time to be bullish on real estate investing. But what are the fundamentals driving that conclusion? Keep reading the entire series to uncover these fundamentals.
Here is what the experts had to say regarding …
Unintended consequences and societal impacts due to COVID — Dr. Masaki Oishi, Practicing Neurosurgeon and Co-founder and Chairman — MarketSpace Capital
As we have all learned this year, life can be very unpredictable. In fact, normal life has been flipped on its head and has tested everyone. So, from a macro-economic level, the following are the observations for various sectors in the real estate industry:
One of the effects of the Coronavirus has been the movement out of office space, ostensibly for social distancing purposes. It is uncertain as to if this will be a short-term or more permanent impact on office buildings. As we all know, technology has advanced to enable everyone to be connected, whether they are sitting at their desk in an office or sitting at their kitchen table. As such, many folks are seeing the benefits and efficiency of zero commute time, a more efficient workforce, lower facility cost, etc.
Many major companies have already started to permanently get rid of their office space and move to remote working arrangements. British Petroleum, for example, is in the process of permanently shifting almost 50,000 employees towards remote working and flexible workplace layouts over the next 24-months. So, it seems like office space is getting ready for a shock as existing tenant leases come up for renewal over the next 12 to 24-months.
The International Council of Shopping Centers (ICSC) has historically cautioned retailers that digital technology will have an effect on the brick-and-mortar sales, but, what the ICSC did not see coming, was the large amount of tenant defaults, bankruptcies and downsizings that were as a result of the government-mandated closure of many retailers. What this means is that many 2nd or 3rd tier retailers (higher credit risks) that once never thought a certain shopping center or prime location was in their price range, now can negotiate from a position of strength with these desperate landlords that are looking to fill vacated space.
Hospitality & Entertainment
Travel and Entertainment budgets have been curtailed due to cost cutting directives from top executives, fear and ability to eliminate travel due to zoom and other technology tools which have now become the “new normal.” Additionally, many directives, recommendations and even mandates from federal, state and local authorities are dictating (or strongly recommending) no travel and entertainment
Just like the airline and cruise industries, the Hospitality and Entertainment industries have been dramatically hit as evidenced by occupancy levels at historically low levels, Average Daily Rates were slashed, 2020 Rev Pars are 48% of what they were in 2019 and even though the operators are doing their best to cut variable costs, their fixed costs of debt service, insurance and property taxes remain unchanged. In short, while their revenues have been cut by over 50%, their largest fixed costs remain the same.
Industrial, Storage & Fulfillment Space
Due to increased demand for online purchasing and growing constraints on supply chain, office flex and industrial space demand is growing. As a result of the “at-home shopping, ordering and direct delivery,” there will be increased demand for assets such as fulfillment centers, cold storage, and dry storage for online ordering. Furthermore, there seems to be upward demand for additional factories as popularity of onshoring sweeps the nation.
Current economic forces have had an impact on the incomes, livelihood, and savings of many citizens. Many people remain out of work and what may have been a dream to purchase their own home a short 12-months ago, many have chosen to remain in a rental category. Many multifamily assets focus on a “middle class America” tenant profile, and that sector continues to see strong lease-up, stable rental rates and an ever-increasing occupancy level for this asset class.
Months on end being stuck in the house or apartment has led people to question their current living conditions. And to go along with the shift away from offices, private designated workspaces in homes or apartments will be more important. People will be spending more time at home and as a result, spending more time inside the home. For these reasons, people are now looking for larger residential units with private office space and as much yard or common area green space as they can get. Tied to this, and another underlying impact of Covid-19, is that people have also learned to appreciate public outdoor spaces a lot more. Parks, green space, community gathering spaces … even if they social distance … and other outdoor areas have become a very important commodity.