Real Estate Investing Outlook
The Pandemic Gave the Real Estate Industry a Crystal Ball to Identify Emerging Trends
by Erica LaCentra
Despite the global pandemic, the real estate investing space, in particular single-family rental, is booming. The SFR market was one of the best performing areas of real estate in 2020 as it mirrored the strong performance seen with single-family purchases. The thing with SFR is that it is a very attractive asset class for smaller-scale investors or even those looking to have supplemental income. It continues to be a great option for those that are wary of the stock market or investing in other avenues because it is a relatively safe and easy way to invest in residential real estate and has consistent long-term returns. So, let’s talk about what the second half of 2021 and beyond has in store for SFR.
Why Is There Such High Demand?
Even pre-pandemic, this was an area of the market that was already experiencing rapid growth due to general demand from many demographics. Millennials that may have been looking for space and the comforts that come with living in a single-family home drove a significant amount of this demand. As this demographic started to get to an age where they are settling down and having families but were not ready or able to purchase a home, renting in the suburbs became a very attractive option. On the flip side, you also have retirees that were looking to downsize and potentially move closer to family as they get older. This was another large segment that was driving demand. Members of older generations who were not interested in owning a home and dealing with the maintenance began looking at single-family rentals to get the best of both worlds.
One of the largest issues that continues to face the market is low inventory. There was a lack of supply of single-family houses throughout the country before the pandemic and that demand didn’t go away once the pandemic hit. In fact, it seemed to accelerate demand in this space because of the mass migration that occurred out of major cities to the suburbs when the pandemic hit. This migration of individuals out of cities has only exacerbated the problem. And in turn, it has caused home prices to skyrocket in many areas of the country because there is simply not enough supply to meet demand.
How Will Prices Fair?
The biggest question on everyone’s mind as home prices continue to climb is, how long will this last? In Q1 of 2021 alone, median home prices were up by around 10% year-over-year. As things look like right now, supply and demand are going to continue to drive home prices up in 2021 and there is no indication that price growth is going to slow down this year.
According to a recent Zillow report (Zillow Economic Research) “annual home value growth will rise as high as 13.5 percent by mid-2021 and for home values to end 2021 up 10.5 percent from their current levels.” This forecast also predicted that sales volume will remain elevated throughout 2021, finishing the year at “6.9 million sales, the most since 2005.”
It’s hard to say how far beyond 2021 it will continue, but unless there is a large influx of inventory, all signs point to home prices continuing to grow throughout 2021 and even potentially into 2022. And for those individuals that are predicting a flood of distressed assets once forbearance and government intervention is removed, that is starting to seem more and more unlikely. The difference between the Great Financial Crisis and any looming fallout from the pandemic is the tremendous amount of equity that homeowners have.
According to Corelogic’s recent Homeowner Equity Report, “U.S. homeowners with mortgages (roughly 62% of all properties) have seen their equity increase by a total of nearly $1.5 trillion since the fourth quarter of 2019, an increase of 16.2%, year over year.” With these gains in home equity, it ensures that homeowners have a reduced risk of being underwater or in the event, they fall on hard times, there are greater options to sell rather than go into foreclosure.
Where is the Inventory?
So, if future distressed sales are not necessarily on the horizon, what other avenues will potentially play into housing inventory growth? While the home flipping industry
is facing its own challenges due to lack of inventory and flipping activity continues to decline due to lack of inventory, new construction is having its moment.
Investors looking to flip homes are running into stiff competition for properties and are also finding it challenging to find deals on properties that would provide a reasonable return on investment and are turning to new construction. While new construction is not without its own potential snags, such as constraints due to rising materials and lumber costs, single-family home starts are rising and are projected to continue to rise; thus, providing one of the best areas of opportunity to add additional inventory to the marketplace.
There is also the thought that inventory levels may rise as more vaccines become available to the general public. While increases in vaccinations may cause some upticks in inventory due to people returning to cities and leaving the suburbs again for whatever reason, this will probably also not have that large of an impact. Since there was already a lack of supply pre-COVID, the best we can potentially hope for once more folks are vaccinated is for inventory to get closer to pre-pandemic levels.
What About Commercial Real Estate?
By all indications, many segments of commercial real estate should recover from the devastation that the pandemic caused. Areas of the market, such as the multifamily space, have already started to rebound, and look as though it will likely come out of the pandemic unscathed. In fact, multi-family housing is poised for remarkable growth throughout the remainder of 2021. Demand in this segment of the market shows indications of increasing as vaccinations increase and people and workforces begin migrating back to major cities.
Other areas of commercial real estate, such as industrial, healthcare, and hospitality are also showing initial signs of growth which should continue as the country recovers. Hospitality, in particular, is also seeing a much-needed rebound as travel starts picking up again. There is already a significant increase in activity and pent-up demand for travel will drive recovery in this area especially going into this summer.
An interesting segment of commercial real estate to watch is adaptive reuse and how certain unused or unwanted commercial real estate can be redeveloped rather than standing vacant. This should be a very interesting trend to watch especially as there is an increased need for affordable housing and so many retail spaces and commercial real estate in prime locations for workforce housing stand unused.
Keep an eye out for unused retail spaces in desirable locations being renovated and redeveloped into affordable multifamily housing rather than being demolished. Also, abandoned shopping malls and other empty storefronts are very desirable for e-commerce fulfillment warehouses. Commercial real estate is the underdog story of the pandemic and hopefully, we will see struggling commercial segments given new life.
A Positive Outlook
As we continue to move past the pandemic world it’s nice to see things looking up and general sentiment in the real estate market remains positive. While the pandemic was a horrible thing, many good things did come out of it. One of the biggest impacts the pandemic has had on the real estate industry was just how quickly it accelerated certain existing trends in the space like the migration to the suburbs or the slow death of retail spaces.
The pandemic effectively gave those in the real estate industry somewhat of a “crystal ball” to be able to easily identify what trends are here to stay and what emerging trends like build-to-rent in the single-family rental space or adaptive reuse to create affordable housing in the commercial space, that may have normally taken years to gain traction, are on a fast track for success basically out of necessity.
Also, even despite the numerous challenges that have occurred, remarkably enough, there is currently no indication of the housing market crashing in 2021 or in 2022 for that matter. While there is a lurking concern that once foreclosure moratoria and forbearance ends, there will be a crash like we saw in 2007/2008, that seems highly unlikely because of existing homeowner equity.
So, as the industry embarks on the next chapter, it’s a bright spot knowing that the current market outlook is positive and will continue to be positive through 2021 into 2022 as we get on the other side of the pandemic.
