2021 Real Estate Investing Outlook
A Perspective on Single-Family, Multi-Family, and Commercial Assets
by Erica LaCentra
Despite still being in the midst of a global pandemic, real estate investing is booming. The Single-Family Rental space in particular is primed for continued growth in 2021. Record-low mortgage rates and lack of inventory continue to drive demand for housing. Couple that with the mass exodus from major cities to the suburbs because of the pandemic, and the industry is seeing spikes in housing prices across the country which has made it unaffordable for many potential buyers. This means more and more people must continue to rent as homeownership is now beyond their reach. The Single-Family Rental space is undoubtably having its moment, but that is just a portion of the big picture. As we head into another year where there is still a lot of uncertainty, how is the rest of the real estate investment industry fairing and what trends lay on the horizon?
How Will Home Prices Fair?
Home prices skyrocketed in 2020 and it no doubt continued to be a sellers’ market. As we saw the year close out, home prices ended “7.6% above where they were in 2019” according to the realtor.com national housing forecast. However, the question that remains on everyone’s mind is, will the growth continue in 2021, and if so, for how long?
From all current indications, the answer is yes, strong growth is expected to continue for home prices in 2021. The median national home listing price grew by 15.4% over last year, to $346,000 in January 2021, based on data provided by realtor.com. Pent-up demand for homes is not slowing down any time soon and there is still no easy answer for how to increase supply in the market. Even as the supply of new home listings has increased since the beginning of the pandemic, it has not been nearly enough to curb the sharp home price increases that we have seen throughout the country.
Many are banking on an increase in new construction starts, renewed interest in home flipping, and finally, an end to the government moratorium on single-family foreclosures to finally remedy the issue of inventory as we go into the spring. The current prediction is that 2021 will display a bit more normalcy than we saw in 2020 with the typical seasonal listing, buying, and selling patterns emerging and inventory increasing in the Spring as we have seen in previous years. From there, inventory levels are expected to continue to improve throughout the fall and into the end of the year as the vaccine is more wide-spread and people can get back to the way things once were. Maybe then we may finally see home prices start to level out.
New Construction and the Reemergence of Home Flips
Builder sentiment in the single-family space remains high in 2021 due to a growing desire to address the insatiable demand for homes with new construction. While Dodge Data and Analytics estimates that “total residential starts are expected to rise 5% in 2021”, starts for single-family housing are estimated to “rise 7% in 2021, to $254 billion, the highest since 2007”, according to Engineering News-Record.
And this statistic is not a fluke. The National Association of Home Builders also projects continued growth in the new construction space, with an estimated “6% increase in single-family housing in 2020, followed by a nearly 3% jump in 2021 and a 2% uptick in 2022”, which is all very good news. However, even with this projected growth, the industry will still be below the production levels needed to keep up with the rising demand for housing. There has been such an immense backlog of projects that had to be put on hold due to the pandemic that it will be challenging to make up for lost time. This is where new construction coupled with renewed opportunities in the fix and flip space will benefit the industry.
For a combination of reasons, it is no surprise that over the past year home-flipping activity dropped. With limited buying opportunities in a highly competitive market, inexpensive homes were in short supply. However, investors that were able to find those opportunities, were able to make hefty profits. According to ATTOM Data Solutions, “the gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the third quarter of 2020 to $73,766—the highest amount since at least 2000”. These high returns on investment will continue to make the flipping space very attractive to savvy investors as long as they can keep finding properties.
How Will Commercial Real Estate Fare?
Commercial real estate was probably the segment of the market that was hit the hardest by the pandemic, and at one point the industry was questioning if it would ever recover. However, it seems like commercial real estate is starting to recover and there are positive indications that hard hit areas will be able to bounce back in 2021.
For example, with employment starting to rebound there is hope that the multifamily space will come out of the pandemic unscathed as an increase in housing demand for workers returns. There is also optimism for the office sector as vaccine distribution has started and it looks like employees will be able to return to work versus solely working remotely in the near future. While many companies will have to adapt now that they know workers can be efficient while working remotely and offer more flexibility, there will still be a need for physical office spaces which is good news for this area of the market.
Finally, one of the more interesting trends that is starting to emerge which should prove extremely beneficial for commercial real estate, is adaptive reuse of currently unoccupied or unwanted commercial real estate. This practice of taking spaces like unused retail or defunct hotels and renovating them into something useful rather than demolishing and redeveloping the space is starting to get traction. Companies like Amazon are eyeing abandoned shopping malls and empty store fronts to be repurposed for use as ecommerce fulfillment warehouses. And developers have been seeing opportunities to convert old hotels or even more industrial spaces into affordable housing. While this strategy comes with its own challenges, it is promising that struggling commercial properties may have a chance at new life.
A Positive Outlook
As we continue to progress through 2021, it is reassuring to see so many indications that the real estate market will continue a positive trend. While there are still areas of uncertainty that investors should be keeping an eye on, such as when government mandated foreclosure moratoriums and forbearance periods will finally be lifted and how that will affect the market, there is nothing looming on the horizon that indicates any sort of crash or major issues in 2021. It is incredibly impressive to have seen just how resilient the U.S. housing market is and continues to be even after how challenging 2020 was.
