The most successful real estate investors know that gut instinct alone is insufficient to identify opportunities. They base decisions on data and statistical analysis. But knowing what data to evaluate, and how, has become extremely challenging as the coronavirus pandemic continues to disrupt all commercial real estate sectors. Some asset classes that investors considered safe in January, such as Manhattan office space and housing for college students, are now some of the most risky.
There are a myriad ways consumers have had their personal and work lives upended and each one represents an investment opportunity around commercial real estate. My firm, 7Park Data, collects and analyzes multiple data sources, including income and payroll data, job posts, firmographics, labor data, permitting, and construction data. We use this to predict supply and demand across all sectors in local markets nationwide and provide valuable insights to the property industry. Here are five asset classes that we have identified that we think investors should consider over the next 18 months.
Class A Multifamily
Class A multifamily has proven to be more resilient to the pandemic’s impact Classes B and C.
According to the National Multifamily Housing Council, a trade association for the apartment industry, the rate of Class A renters who have paid their rent on time has remained stable over the last three months, whereas Class B/C have fallen:
That resilience will be put to the test. The CARES Act’s 120-day moratorium on evictions expired last month, and negotiations in Congress over a second coronavirus relief package have stalled. President Trump on August 1 signed an executive order to halt evictions, although it is unclear whether that will be enough to will help the approximately 20 million Americans who face the loss of their homes over the next few months.
“(We) urge the Trump administration and Congressional leaders to restart negotiations and reach a comprehensive agreement on the next COVID relief package,” said David Schwartz, Chair of the The National Multifamily Housing Council (NMHC). “It is critical lawmakers take urgent action to support and protect apartment residents and property owners through an extension of the benefits as well as targeted rental assistance. That support, not a broad-based eviction moratorium, will keep families safely and securely housed as the nation continues to recover from the pandemic.”
| City | May 1-13 | June 1-13 | July 1-13 |
|---|---|---|---|
| Class A | 84% | 90% | 84% |
| Class B | 83% | 90% | 82% |
| Class C | 73% | 84% | 69% |
Despite the looming uncertainty, Class A has shown consistency throughout this crisis and we believe it will continue to do so. Additionally, institutional investors continue to pour capital into the sector across major and secondary cities, which should narrow an investor’s research into what specific markets present the most attractive opportunities.
Secondary Cities
Secondary cities, those with populations below 500,000 people, are drawing an increasing number of white-collar workers searching for a lower cost of living, smaller tax burden, job growth, and affordable housing.
Markets outside of the core coastal markets are significantly more affordable, with many rent-to-income ratios below 0.30, as seen in Figure 1.
| City | Average Income | Average Monthly Rent | Rent to Income Ratio |
|---|---|---|---|
| Charlotte, NC | $73,202 | $1,515 | 0.25 |
| Austin, TX | $98,124 | $2,046 | 0.25 |
| Jacksonville, FL | $67,232 | $1,572 | 0.28 |
| Atlanta, GA | $73,251 | $1,744 | 0.29 |
| Nashville, TN | $70,384 | $1,171 | 0.30 |
According to the online consumer real estate platform Redfin, the highest percentage of Atlanta’s and Nashville’s new residents are from New York City. New residents in Phoenix, Dallas, and San Diego are mostly from Los Angeles; Portland’s and Austin’s new residents are primarily from San Francisco.
“People in the coastal markets are just fed up with double-digit price increases, and they’re moving to a commuter town or to the middle of the country,” said Daryl Fairweather, Redfin’s chief economist in an interview with The Washington Post.
The acceleration of the work-from-home trend due to coronavirus-forced business closures and social distancing practices has led to a nationwide awakening among knowledge workers that they don’t need to make the daily commute to and from an office location in a large city.
A recent Gallup poll found that as states lift public health restrictions:
- 62 percent of employed Americans are working from home—double since mid-March
- 59 percent prefer to continue to work remotely as much as possible
- Only 41 percent want to return to their workplace or office, as they did before the crisis
Whether or not they work from home, reducing their overall exposure to the coronavirus and future virus outbreaks is another driver of this trend. Secondary cities have reported much lower numbers of coronavirus infections and COVID-19 patient hospitalizations than the country’s largest cities. They are less densely populated, attract far fewer tourists, often do not serve as international travel hubs, and have fewer public transportation options than larger cities.
It’s important to note that the pandemic remains virulent and unpredictable. As of this writing, the numbers of new cases in cities and states that recorded higher infection rates in the early days of the outbreak have declined, but the opposite is true for regions that previously had lower rates of infection.
Single-Family Rentals
The rising delinquencies in rent payments nationwide, high unemployment, and consumers’ anxieties over job instability will likely compel would-be home buyers to continue renting. But that won’t prevent them from trying to secure the space and stability that a single-family home offers. SFR rent collection has actually been stronger than Multifamily, with about 5 percent uncollected.
According to Jeff Cline of SVN/SFRhub Advisors, demand for single-family portfolios, defined as five or more homes, has skyrocketed in the last month, up 650 percent. That is spurring leasing companies like Invitation Homes, the country’s largest single-family landlord, to expand their portfolios of single family rentals. Invitation Homes raised $448 million in a share sale in June and reportedly plans to use a bulk of the proceeds to buy more properties.
According to John Burns Real Estate Consulting, the single-family rental space was the first to experience more robust demand after the pandemic struck as apartment residents and city dwellers sought out larger spaces. Most operators reported an uptick in demand during the last two weeks of March.
“Single-family rentals allow financial flexibility (no need to qualify for a loan, no down payment, no 30-year mortgage) and privacy, with enhanced social distancing opportunities for residents,” added Ken Perlman and Lesley Deutch, both Managing Principals at John Burns. “Often, they are renters by choice and will pay a premium to live in a dedicated community with other renters and community amenities rather than in a privately owned rental home.”
Since the pandemic struck in mid-March, the hardest-hit markets from an economic perspective have been those with a concentration of services workers, such as Las Vegas and Honolulu.
ECONOMIES WITH THE LARGEST CONCENTRATION OF SERVICES WORKERS
% Percent of Jobs in Hardest Hit Services Categories
| Top 10 (Most Impacted) | Bottom 10 (Least Impacted) | ||||
|---|---|---|---|---|---|
| 1. | Las Vegas, NV | 38.50% | 1. | Raleigh, NC | 13.51% |
| 2. | Honolulu, HI | 32.75% | 2. | Pittsburgh, PA | 13.55% |
| 3. | San Antonio, TX | 30.48% | 3. | Milwaukee, WI | 14.39% |
| 4. | San Bernardino, CA | 27.70% | 4. | Boston, MA | 14.43% |
| 5. | Virginia Beach, VA | 26.24% | 5. | Detroit, MI | 14.78% |
| 6. | Orlando, FL | 25.73% | 6. | Charlotte, NC | 14.93% |
| 7. | Sacramento, CA | 25.36% | 7. | San Jose, CA | 15.26% |
| 8. | Columbus, OH | 22.69% | 8. | Indianapolis, IN | 15.64% |
| 9. | Tampa, FL | 22.53% | 9. | Providence, RI | 15.73% |
| 10. | Denver, CO | 22.15% | 10. | St. Louis, MO | 15.88% |
An institutional investor’s focus should be on markets whose economies are well-insulated from future shut-downs. Secondary cities like Raleigh and Pittsburgh with large percentages of white collar workers will continue to thrive. Employees can work from home, indefinitely if need be, and these cities offer more affordable “office space” than Manhattan or San Francisco.
Last-Mile Industrial
The pandemic has dramatically impacted the retail and restaurant sectors, forcing consumers to change how they approach shopping. Why expose themselves to health risks by browsing store aisles or spend time waiting in curbside pickup lines when they can buy virtually anything online and have it delivered to their doors?
As a result, online shopping’s popularity has exploded (Figure 3). Retailers have invested heavily in opening new warehouses and distribution centers to speed the delivery of products as they travel the crucial “last mile” to the consumer.
Of course, online sales will decelerate as states lift health restrictions and allow brick-and-mortar stores to re-open. For the week of June 6, online goods order growth was over 54 percent, down from over 65 percent the previous week and over 85 percent from its April 25 peak. All product categories experienced sales declines—except one.
Grocery-Anchored Retail Stores and Cold-Storage
Supermarkets were deemed essential and permitted to remain open, rewarding investors who bet on grocery-anchored retail locations. But that did not discourage consumers from doing their grocery shopping at home.
Online grocery sales have posted triple-digit order growth since the onset of the pandemic in mid-March. Grocery and other food merchants (including pet supplies) were up 110 percent for the week of June 6, flat from the previous week (see Figure 4).
Grocers will look to create facilities exclusively for delivery in addition to their in-store models. Therefore, cold-storage has and will continue to be an excellent opportunity for institutional investors. An entirely new CRE sector may emerge for online grocery delivery that eliminates pick-and-delivery from brick-and-mortar locations.
Coronavirus infection rates are rising in the majority of states, ensuring that the pandemic, and its impact on the nation’s economy, will drag on through at least the remainder of 2020. While Congress deliberates the next stimulus package, millions of renters face the threat of eviction, the unemployment rate will likely rise as businesses that opened are forced to close again, and students K-12 and in college will have to attend classes from home. Yet as the old saying goes, “the numbers don’t lie.”
With challenges come opportunities, and the current circumstances are no different. To identify and capitalize on attractive investments, commercial real estate professionals need to leverage diverse datasets (about hiring, consumer spending, permitting, demographics, etc.) and data-science powered tools to create actionable insights that are relevant today, not based on six month old news. Adding data-based insights to the tremendous amount of human capital and expertise in the commercial real estate industry will allow investors to go beyond the five opportunities outlined here and find their own unique investment thesis.