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Investor trends issue: Real estate in 2021

Investor trends issue: Real estate in 2021
by Brad Cartier, posted in Newsletter

There were three important reports released last week that you should know about, starting with PwC’s annual Emerging Trends in Real Estate 2021: US and Canada. It’s 117 pages of non-stop data, charts, and key takeaways. Don’t worry, I read it, so you don’t have to.

WFH — This is a trend that is here to stay for the foreseeable future. Almost all respondents accepted that working from home will continue, at least in a partial way, beyond the pandemic. That said, “more than 60% of professionals agree that office tenants will look to expand spaces for new ways of collaboration and interaction, while complying with social distancing measures.”

WFH is here to stay according to decision makers

Source: PwC

The Great American Move — To the suburbs, and from apartments to single-family homes. This is particularly true, according to the report, in Sunbelt markets. It’s not just work from home, but higher prices, cost of living, more space requirements, and taxes that are pushing home buyers out to the burbs.

A significant single-family-housing market trend emanating from the COVID-19 pandemic is “the Great American Move.” People (and businesses) are moving in all sorts of ways—to different geographies, from denser cities to the suburbs, from an apartment to a home, and, for some, back “home” to live with family members. There is no better evidence of the Great American Move than the booming single-family-housing markets.

Indeed, Mansion Global reported last week on the rise in interest in single-family homes over 2020, with the number of contracts signed on homes valued at $1 million or more rose 38%.

There are new boomtowns in America, see the more prominent ones in green below.

Home buyers are on the move to the burbs

Source: PwC

Winners and Losers — Real estate overall is expected to suffer a setback in the coming years as the effect of the economic shutdowns is felt on the economy. Losers will be retail and hospitality, but winners will emerge in warehousing, data centers, and single-family homes (see #2 above).

Though real estate capital markets have settled, most anticipate overall real estate prices to fall 5-10% as income is curtailed for several years…The long-term outlook in the real estate sector hinges on the country’s ability to reign in COVID-19.

Top Markets — And who doesn’t love a top markets list? Here are PwC’s top markets to watch in 2021:

  1. Raleigh/Durham, N.C.
  2. Austin, Texas
  3. Nashville, Tenn.
  4. Dallas/Fort Worth, Texas
  5. Charlotte, N.C.
  6. Tampa/St. Petersburg, Fla.
  7. Salt Lake City, Utah
  8. Washington D.C./North Va.
  9. Boston, Mass.
  10. Long Island, N.Y.

The Top 10 overall real estate prospects [are] powered by strong growth, homebuilding outlook, affordability and job prospects…Increasing interest in suburbs make Sunbelt cities more attractive, highlighted by Raleigh/Durham being on the top of the list. Cost-conscious companies will gravitate toward cities that are business-friendly and low cost with large, growing workforces.

In terms of investor demand, these markets will be the strongest in 2021 according to PwC:

  1. Austin
  2. Dallas/Fort Worth
  3. Nashville
  4. Charlotte
  5. Boston
  6. Raleigh/Durham
  7. Atlanta
  8. Denver
  9. Long Island
  10. Seattle

Finally, investor sentiment was the highest for the multifamily asset class in these markets:

Top multifamily markets in the US for investor sentiment - PwC

Source: PwC

Multifamily is solid — One of the only asset classes that fared reasonably well during the pandemic, buoyed by low interest rates and high demand.

The amenity wars of the 2010s—the chic and trendy rooftop pools; the spacious, natural-lit fitness centers; the social/work/refreshment zones, and so on—will likely pivot during a more cautious, socially distanced, mask-wearing era. Multifamily experts are abuzz about the 2020s becoming a new battleground for safe and remote work, play, fitness, food, coffee, and health space.

Remote work

OWLLabs, a video conferencing provider, released last week an important report following the WFH trend titled, State of Remote Work 2020. The trends reported in this paper have important implications for real estate investors and developers, here are a few.

  • 1 in 2 people won’t return to jobs that don’t offer remote work after COVID-19.
  • 77% of respondents agree that after COVID-19, being able to work from home (WFH) would make them happier.
  • 75% of people are the same or more productive during COVID-19 while working from home.
  • 1 in 2 people would move if they were able to WFH all or most of the time.
  • Working remotely saves 40 minutes daily on commute.
  • During COVID-19, on average, people are saving $479.20 per month.

People are happier working from home - OWLLabs

Source: OWLLabs

And, with as much emphasis 📢 as possible on the following…

  • After COVID-19, 80% expect to work from home at least 3x/week.
  • 81% of respondents think their employer will support remote work after COVID-19.

If you could move from an Urban center, would you - OWLLabs

Source: OWLLabs

In summary, people are saving money, happier, more productive, and expect to continue to WFH heading into a post-pandemic world. For real estate investors considering new acquisitions, this is a massive bellwether.

If the above data turns out to be reflective of homeowner and renter sentiment, assets that maximize outdoor and office space and are in affordable markets could be one of the strongest long-term real estate investments in the next decade.

Rent and vacancies

Apartment List’s December 2020 Rent Report was an interesting one, highlighting a more stabilized and healthy rental market with rents decreasing only 0.5% (typical for the slow winter months). Interestingly, we expected that rents would fall in major urban areas, and they continue to, however we are also seeing rising rents in affordable suburban markets due to rising demand.

Rent contraction or growth by city - America Map - Apartment List

Source: Apartment List

According to Apartment List, 2020 can be broken into three distinct phases:

  1. January to March: the pandemic had yet to significantly disrupt everyday life in the United States, so rents followed their normal trajectory.
  2. March to June: the pandemic truly disrupted the market. Americans were told to avoid non-essential moves, slowing the market tremendously. In previous years rents rose one percent per month during this period, but in 2020 they moved in the opposite direction.
  3. Since June: the market has moved in a fairly predictable fashion. During the summer renters started moving again and prices rose through August, where the market typically peaks. Since then they have cooled, also in line with previous years.

National rent index compared to 2018 and 2019 - Apartment List

Source: Apartment List

When you look at the 50 largest cities in the U.S., there is a clear correlation between the amount of average rents and the increase or decrease of rental rates over the course of 2020.

Expensive rental cities in the US see the largest rental rate declines in 2020 - Apartment List

Source: Apartment List

In conclusion, the report notes that financial hardship has increased downgrade moves by American workers, as many of them have been forced to consider more affordable housing options.

But, “at the same, there is evidence that a growing embrace of remote work will outlast the pandemic, which could significantly alter the housing choices of workers in these flexible arrangements. Amid this backdrop, we’re seeing a sharp dropoff in demand for expensive rental units in cities like San Francisco and New York, while more affordable midsize cities such as Boise are continuing to heat up.”

In Affordable Midsize Cities, Rent Growth Accelerates - Apartment List

Source: Apartment List

Couple this with Housing Wire’s recent reporting on Boise, titled Homes in Boise, Idaho are “flying off the market”. There is less than a week’s worth of inventory in this market! 🤯

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