Founder, CEO of Blue Lake Capital LLC. Helps passive investors grow wealth through real estate. Podcast Host: Ready2Scale. Mentor.
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The pandemic has changed the way we live our lives today, from wearing a mask when venturing to public places to washing our hands to distance learning for students from grade school through college. Not surprisingly, it has also created a huge impact on investors. The damage it did to the economy and the resulting uncertainty of when the economy will improve and when unemployment numbers will drop to more manageable levels is causing investors to rethink their overall investment strategy. Many have become risk-averse and are looking for investments that have historically been stable and provided excellent returns. This is especially true in the commercial real estate arena.
Office Properties
For investors who have put large sums into office projects, the pandemic was a wake-up call. Companies began instructing employees to work from home, in concert with states’ mandates to avoid people congregating in large numbers. However, many companies realized that not all of their employees really needed a physical office and working from home via Zoom and other tools provided a smart alternative.
In fact, some began telling employees that for the foreseeable future they should plan on working from home, with no return date in sight. Experts began predicting that this would have a detrimental effect on commercial real estate, with many offices sitting empty. Sadly, food service establishments and coffee shops that provided service for tenants of those office buildings began closing, as their traffic and revenue depended on traffic from those offices. That’s how the downward spiral in office buildings began, and the picture remains uncertain.
The plus side for those investing in office properties is that there are companies that recognize their need to have a physical office site for company culture, community and keeping employees connected. For many, face-to-face communication and in-person creative meetings have no substitute on Zoom. That is why we can expect that office will still play a vital role in the business arena.
Retail Properties
The retail sector was already hurting, as more and more brick-and-mortar stores closed and left shopping malls, leaving major holes in the retail tenant mix. Consumers were looking for a better experience from their retail shopping experience before the pandemic hit. Stores began closing, followed by restaurants that were forced to close due to the pandemic. Estimates say that anywhere from 40% to 75% of restaurants that shuttered during the pandemic-mandated closures will not reopen.
While online shopping will continue to soar, there is still a need and a desire for physical retail. The reasons are varied, from shopping being a recreational activity to the fact that shopping is also a sensory experience; many customers want to touch an item or experience it in person before making a purchase. The areas that we can expect to grow include both community and convenience-based retail.
In addition, shopping centers may seize this opportunity to lease to non-retail tenants, such as dental practices, physician offices and clinics and other health-care sector tenants. They might also consider leasing to colleges for satellite classroom instruction. These types of tenants are quite stable and may bolster the property rental revenue without much risk of closure that owners and managers face with more traditional retail businesses.
Multifamily Properties
Prior to the pandemic, multifamily properties were considered a top investment. Prices continued to soar on multifamily properties, with some even selling above their asking price. This, along with foreign investment, helped to create a paucity of available quality properties, which further fueled the rampant price increases.
Despite the pandemic, rental demand in multifamily remains strong. The factors that fueled the demand prior to the pandemic remain intact. For example, downsizing baby boomers are still looking to lease a luxury rental rather than deal with homeownership, and homeownership remains out of reach or unappealing to many millennials due in part to student loans and other debt, so they are renting instead. Finally, Generation Z, which is huge in numbers, is now entering the housing market and doing it by renting as the entry point.
New multifamily properties tend to feature open green spaces along with entertainment options. Amenities included in newer rentals and value-add units include appliance upgrades, high-tech thermostats and energy-efficient HVAC systems. Sponsors and investors are increasingly interested in purchasing older properties and doing value-add renovations that help to boost rents and income.
Summary
The pandemic has forced investors to rethink their investment strategies given the societal changes that have taken place, from employees working from home to a decrease in brick-and-mortar retail tenants. Many real estate investors are turning to multifamily properties, which have a solid track record of both stable income and price appreciation over the years.
While there will always be a need for offices, and retail developers are looking at new tenant revenue from non-retail tenants, I believe the multifamily sector has the better track record for profitability and the best potential for growth in the coming years.
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