The following post is courtesy of Diane Harrison who is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.
2021 offers a new chance at beating back the pandemic, with a widespread rollout of vaccines that will help mobilize the US economy again. While much remains unknown about the anticipated recovery and its timetable, some areas of the market appear to have an optimistic view of where things are heading. Over the past several months, I have had many conversations with alternative managers preparing to boost their marketing efforts in a variety of real estate or related market investment strategies, all geared towards high net worth investors. This inspired me to ask the question, ‘Why is real estate the place to invest in 2021?’
While there are lots of industry-related analytical assessments and reports on the overall landscape of real estate valuations, performance reports and the like, I was more interested in the general market dynamics that have caught the attention of both the managers who specialize in real estate investments and the buyers who are seeking them out.
I wanted to find some cogent replies to the investor question being asked of money managers offering real estate-based strategies, which is ‘Why should I being putting more money into another real estate fund right now and with you?’ Before a manager launches into the sell story for their own particular angle on real estate investment opportunities, these general topics can help them set the table for the conversation to come.
THE TEMPORARY SHUT DOWN MIGHT BE MORE PERMANENT THAN PREVIOUSLY THOUGHT
2020 was a year of great transition, as the nationwide shut down of March extended in large measure throughout much of the rest of the year. Forbes.com ran an article in December, ‘Real Estate Investment Outlook 2021’ that suggested many of the jobs lost in 2020 will never be coming back. In the industries where work from home situations were already being tried and tested, the forced shutdown of many office buildings created a surge in working remotely that isn’t likely to be abandoned going forward. Additionally, many of the jobs lost to the hospitality, service, and retail sectors are in question as to when or if they will ever return to the workforce.
The Forbes article points out one reason why this shift in where people work impacts the real estate scene: Rentals in the midrange will likely stay favorable, as people move for better job prospects and rent in their new area. Low-end rentals are a much riskier investment prospect, as the job base that typically supports such rentals suffered greatly in the pandemic and these are a large portion of the jobs that might never come back.
THINGS (AND PEOPLE) ARE ON THE MOVE
Another casualty of the pandemic is the negative impact it has had on many of our urban centers. I happen to live in the commuting band of suburbia surrounding New York City, one of the hardest hit by the virus and still reeling from the economic impact the shutdown has had on its workforce and residents. Realtors in the tri-state area of NY, NJ and CT have seen a tremendous influx of buyers seeking to relocate out of NYC for houses within a 2-hour commute from its center, where they can find the space to accommodate longer-term work from home situations. Others have flown south for a better climate and outdoor lifestyle. The result is a shift in the demographics of the city that, frankly, has grave consequences for tax base revenues going forward. And NYC is by no means the only urban casualty of the pandemic; similar exoduses are happening from California to Texas, Idaho, Nevada, and Arizona, and the real estate value of all these areas is showing its impact.
The website Millionacres.com surveyed its readers about their predictions for 2021 and the findings were interesting to see. Real Estate Investing in 2021: Predictions from Investors and Experts, which ran on 1/22/21, summarized its key findings:
- Investors think mortgage rates will remain around 3% in 2021. Our expert agrees.
- Medical will be the hottest type of CRE property in the coming year, according to 39% of our investors, with industrial a close second (32%). Our expert sees continued problems in the retail sector.
- 40% of investor respondents say that housing prices will stay high through 2021.
- Big-city rents won’t return to pre-pandemic levels this year, according to 73% of respondents. Our experts think housing reform could spur increased interest in high-density development.
- Only 16% of respondents say they’ll definitely be investing in an opportunity zone in 2021, while 40% are open to it. Our expert says this could be a good year to invest in these zones.
THE HOME RENOVATION CRAZE HAS MOVED INTO COMMERCIAL SPACE AS WELL
One of the good news items arising from 2020 is that inflation remains low, and renovation activity will be a key focus in 2021. On the residential side, people are investing in updating or adapting their homes to better suit their work/life situations. Areas of the residential markets attracting new buyers are enjoying a renovator’s dream for fix-n-flip properties, including southern states such as Florida, Texas, and the Carolinas. This growth is not limited to the sun states; there are development hotspots throughout the nation, as people are free to choose where to live outside the boundaries of brick and mortar worksites, and investors and developers are taking notice.
Commercially, there is a growing trend for developers to undertake what is known in the industry as ‘adaptive reuse,’ or the rehabbing of an existing commercial space into a new use facility that better suits today’s needs. The suburban office buildings and shopping malls that have gone empty for months or years in search of a tenant are being looked at for adaptive reuse as facilities such as assisted living quarters, affordable housing, and industrial use commercial sites. In my own town, a sleepy hamlet in the heart of NJ horse country, one such adaptive reuse project saw a former Wal-Mart store that was too small to be refitted as one of the company’s super-stores sold to become a commercial medical marijuana growing site.
Managers who are offering real estate-based alternative investments have good reason to be excited about the opportunities to come in 2021. With a little forethought and communication planning, they can begin their 2021 investor outreach based on some of these general market themes that support the enthusiasm for committing capital to a real estate-based venture.