Real Estate Fund Industry 2021 Expectations

Real Estate Fund Industry 2021 Expectations

by Jason Gilbert, Patrick Clancy
March 30, 2021

The real estate market experienced major shifts in 2020 caused largely by COVID-19. As a result, most real estate funds had to rethink their investment strategies. It appears some of these shifts will be permanent, but to what degree?

While no one has a magic ball, there are key factors you can investigate to help identify what sectors of the real estate industry will revert back to their pre-pandemic trajectories, what new opportunity areas will end up driving the industry in the next three to five years, and what operational and regulatory adjustments you may need to make to help set your fund up for continued success.

What real estate sectors have been most affected by COVID-19?

Just like how e-commerce has “killed” malls, it seems e-working may be doing the same to large office spaces and multi- and single- family residences in major cities. Simultaneously, there has been a run up in prices for single family residences in so-called “Zoom” cities and the suburbs. With people and businesses leaving for more affordable locations with more favorable tax regimes. Coupled with lockdown policies that have decimated the travel, retail and hospitality industries, overall demand for traditionally desirable geographies has dwindled.

The surge in e-commerce is based mainly on convenience, but the reasons for demand in residential and office real estate differ greatly. Prior to COVID-19, the flexible office sector made up just 2% of the commercial real estate market. By 2030, that number is expected to reach 30%. So, an increased number of people working from home is here to stay, but not at current levels.

From a corporate perspective, it’s difficult for businesses to maintain and promote their company culture with a totally remote workforce. Technological innovations and convenience have killed the expectation of having everyone in the office five days a week. We’ll probably see companies consolidate their current office spaces — eliminating large campuses in favor of smaller central offices and regional satellite offices.

Another factor in the mass exodus from large cities is what made them desirable in the first place (culture, nightlife, entertainment, etc.) have been nullified by the pandemic. People are social creatures though, and the need for human connection, culture and recreation have only been amplified by the fact that we have all been isolated for the past year.

As more people move to rural areas, they’re effectively arbitraging the costs of city living by getting exposure to more space, but less of the lifestyle they’re accustomed to. Many people also realize that maintenance on larger single-family residences is expensive and laborious. In comparison, condominiums in cities have these facets handled by property management companies. The pandemic has effectively drawn a line in the sand, and we are seeing friends and family determine which locale, property type and lifestyle they’d prefer to live.

Where are the real estate investment opportunities?

It’s still slim pickings for home buyers, which supports the price appreciation of housing in popular areas. Low mortgage rates also facilitate higher purchase costs. Whether it’s buying a single-family home or condo, we see single family homes still providing ample returns for funds willing to do the deep dive in the right areas/demographics.

The current lack of demand for commercial and residential real estate in big cities is driving prices down but this will likely change in the next few years. The current moratorium on foreclosures won’t last forever and we can only speculate on the eventual fallout.

For those that have capital to spare — and there is a great deal out there — look for value-add investment opportunities in large cities focusing on these retail, entertainment/hospitality, and empty office spaces. It’s important to keep in mind that major players, such as Amazon, have been investing heavily in these types of property for the past five years. They’re currently utilizing these spaces as warehousing facilities as they tend to be centrally located near housing developments.

Warehouse facilities in general have been central to many real estate fund’s strategies and will still be a decent play (now and in the future) as the current increased demand for distribution centers and storage spaces doesn’t show signs of slowing down, but margins are getting compressed.

After a year of missed in-person business meetings or vacations, you can feel the pressure and desire to get back to traveling. In this example, hospitality is an easy winner in the next couple years, the entry point and price may be right.

What should you be doing now to prepare your fund for future success?

There’s currently a lot of demand to invest in equity markets and an abundance of capital available. Every fund manager should be prepared to capture this investment capital. But be aware that this preparation process is a recurring effort. Your fund’s daily activities should be ready in the event a significant investor showed interest tomorrow. You should have items like a clean reporting package that an investor can easily digest. Also, a preprepared due diligence questionnaire folder that answers questions about experience, history, service providers and investor safety can lead to investor confidence and speed up the courting process.

If you have any questions about what the future holds for the real estate market or how to optimize your fund’s operating and back-office procedures, reach out to our dedicated Real Estate team to learn more.

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