Where are the Next Real Estate Investment Opportunities?

A crisis produces opportunities. 2020 has been one crisis after another.

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With businesses altering the way they run, government policy continually changing, and people’s living and working environments shifting, it all impacts the real estate market.​​

Most market statistics are not current enough to reflect the changes resulting from this crisis we are going through to give us any guidance right now. Therefore, I want to give my perspective on upcoming real estate investment opportunities based on what I see is currently happening in the economy.

The current economy is being manipulated through massive government stimulus, which has propped up consumer spending through this crisis. However, as businesses slowly reopen, we are watching the economy begin to rebound as people reenter the workforce.

If this crisis continues to improve, I believe there is a bright future for certain real estate asset classes, and especially for those willing to take a risk on underperforming assets.

Two real estate asset classes to consider investing in and why?

1. Residential Housing:
   • There is increased demand for better and more efficient residential housing –
     • In San Diego County, single-family housing inventories are down 36% from the previous year. Despite a drop in sales volume, prices remain reasonably stable.
     • Multi-family housing is firm, with overall vacancy below 4% and fewer units coming online. However, individual submarkets like downtown San Diego have a higher average vacancy and the most units to absorb.
     • People are working from home and finding out they need more space, which will help fuel the demand for more efficient and better housing.
     • The health risk of COVID-19 is resulting in many people deciding to transition into housing with more privacy, e.g., detached housing.
     • Gas prices have declined to make it more feasible for people to live in the suburbs, supporting the need for people wanting to have their own space.
     • The inner-city turmoil is resulting in people fleeing to the suburbs for less density, more privacy, and security.
     • There will be more demand for detached single-family housing than multi-family; however, both markets will remain strong.
2. Industrial/Warehouse:
   • There is increased demand for industrial back-office space –
     • The increase in E-Commerce is resulting in less need for physical retail space and more need for industrial back-office space for shipping and storage. Also, the change in restaurants to more carry-out has increased the demand for more secondary back-office industrial-type space.

For investors with tolerance to risk, I believe there will be investment opportunities in the underperforming office & retail markets.

• Office
  • The fall-out from people working from home will hurt commercial office space needs, an increase in vacancy, downward pressure on rents, and ultimately lower property values.
  • An increase in committed office space coming online will further exacerbate the vacancy problem.
  • In the office market, for example, Twitter in May 2020 announced it permanently eliminated the need for much of its office space and will have people continue to work from home. A trend that is prevalent throughout the US market that will negatively affect the office market and fuel the residential housing market.
• Retail
  • There will be decreased demand in retail space in general, but specifically the restaurant space. Restaurants have learned to adapt and change by generating more income with less space, e.g., carry-out dining. The result will be the need for less prime rentable sq.ft.
  • The older generation has been forced to use E-Commerce, which has created a new segment of users, helping put downward pressure on the need for brick-and-mortar retail space.
  • The psychological impact of the COVID-19 with social distancing will result in businesses shifting away from serving people in a physical space, e.g., more carry-out dining, and the elimination of buffet type restaurants altogether. Restaurants will not be able to generate the revenue they once could in the same amount of space. The result is they cannot afford the higher rent, will need less space, which will put downward pressure on real estate valuations.
  • Businesses are becoming more efficient, needing fewer resources, including retail/restaurant space.
  • I have a client purchasing a vacant Souplantation building at below the cost to build, and also a client looking to buy an empty big-box retail store with similar circumstances. These transaction types, when priced right, will be great investment opportunities. However, certain uses will continue to need brick-mortar buildings, e.g., grocery & liquor stores, gyms, and destination type uses where e-commerce is less of a threat.

The owner-occupied commercial property sales will be strong due to government intervention for small businesses through SBA financing. The SBA is providing low-interest rates and favorable loan terms, thus increasing the demand for owner-user properties across all real estate classes generating strong demand and increased valuations.

With global interest rates low, and massive government debt, the pressure will remain for a low-interest-rate environment well into the future, further stimulating the economy and supporting real estate investment opportunities.

How we purchase products and services, where we work, how we interact to remain healthy, and decisions we make about where we live; all impact real estate values and create investment opportunities.

I believe the changes we are experiencing due to the COVID-19 crisis are not temporary but will become more the new norm.

We cannot look back to what was. We must look ahead to what is and adapt. There are opportunities for those investors who take notice of what is happening now, have the vision, and the courage to take a risk.

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How have the changes taken place in your business affected your risk tolerance for investing in real estate?