The commercial private real estate market will begin to recover from the pandemic this year, but it will be a slow and rocky road to total health. Some parts of the real estate market may fare badly in the first quarter and the beginning of the second quarter due to the worsening epidemic. Some areas of real estate are poised for rapid growth, while others are expected to underperform. The private real estate market will be primarily driven by location and price.
As the year progresses, immunizations should be made more accessible to the general public. The employment process will resume, and stores will reopen by then. Though the new normal won’t start to take shape, the picture for offices, hotels, and other areas won’t become apparent until then.
The most significant developments in private real estate will be as follows:
- We are not isolated.
Investors are prepared to settle for a lesser return because the rate of return for risk-free investments is zero. And the returns you may expect from the stock market as we advance will probably be much lower than you believe they will be. Every asset class is experiencing a decline in the anticipated returns.
- The migration out of large cities continues.
For those in New York, Chicago, or San Francisco who are worried about the exodus of residents, the answer is simple: you won’t be able to. Things will keep happening like this.
- Shift to states with low costs and favorable business climates.
There is no longer any reason to go from Austin or Nashville to New York City only to get a job and a decent wage. State income taxes are not levied in the U.S. states of Texas and Tennessee. Another option is to find a job with a San Francisco-based firm while residing in a city like Denver, Phoenix, or Charlotte. These are just some of the fast-growing metropolises that compete favorably with New York City, Chicago, and San Francisco regarding the quality of life, cost of living, and climate.
- The main factor will be the cost of living.
Workers are no longer restricted to desk jobs in major cities, fostering greater flexibility in the labor sector. Since people may now find jobs from anywhere, they will continue to relocate to more affordable cities. You will no longer have to spend an hour in traffic.
- Alterations to the rules governing Qualified Opportunity Zones are possible.
As a result, you should expect to see some action on the topic of amending rules regulating qualifying opportunity zones. I have no idea how it will manifest itself at this time. Possible new regulations include having to work more closely with local organizations and submitting additional paperwork. Otherwise, they might insist on Treasury permission for all initiatives. Also, the option of redoing the maps has not been ruled out.
- Office space continues to have a low demand.
The office market will experience stress even when the economy recovers and workers return to their jobs. Businesses have realized they can successfully run a hybrid or virtual office without decreasing productivity. Moreover, the cost is far lower than leasing a conventional office building.
If you run a medium-sized firm in Chicago and your office rents for $50 per square foot, you would have 5,000 square feet of space. It adds to a total of $300,000 yearly, plus $50,000 for operating expenses like taxes and insurance. Alternatively, for around $100 per month, you can subscribe to a service like a Zoom or WebEx.
- There will be no rise in interest rates.
The Federal Reserve is more concerned about a recession than inflation. The Fed intends to keep interest rates artificially low until at least 2023.
- Multifamily homes in cities and the suburbs are increasing in value.
Large sums of capital are actively seeking multifamily investments. People are moving out of cities and into the suburbs. Sub-2.5 percent borrowing rates currently prevail. It is possible to expect returns of 6.5 percent on a core asset, for instance, if you can deliver unlevered yields of 4.5 percent. If you believe your rents have room to increase, this may interest you.
- By the spring, suburban multifamily rents will be exhibiting actual rent growth.
This pattern will appear in the spring and persist through the year’s second half. The demand for multifamily dwellings is strong. Also, there is a shortage of available rooms. Multifamily rents are expected to increase as the economy recovers and wages rise.
- Urban Class A multifamily rental prices will not improve.
Too many people have fled cities for multifamily urban Class A rents to recover, even if people get vaccines and the economy improves. In addition, there is a large number of unoccupied homes and other buildings. The road to rehabilitation is long, and it will be an ongoing procedure rather than a one-time occurrence, and it will continue for the rest of the year at the very least.
Tip: One additional benefit is that chatting to actual human beings will yield the most helpful information and knowledge.
Investing in private real estate requires talking to people. Don’t assume that based on statistics alone, you know whether you should make a choice or not. You may, for instance, dial up some contacts among your acquaintances who are partners at legal companies. Interrogate them on the topic of conversation between their spouses. The legal industry is a prominent Class A office space consumer in most major cities. As the most significant operating expense for most businesses, office space is frequently discussed among partners. It’s through interactions with others that one gains wisdom.
******************************
Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.