CEO/Founder of Smart Property Systems and Ideal Landlord, Jack of all Trades in charge of delivering a best in class solution to customers.
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To say that this is the strangest year most of us have ever experienced is an understatement. Let’s talk about the changes that are happening in the real estate industry as a result of the pandemic.
First, the good news. The combination of historically low interest rates and people leaving big cities in droves has fueled the single-family housing market around the United States. These low rates are helping people who previously could not afford to buy a home to do so now. To get that ultra-low rate, lucky buyers who still have a job will be required, in some cases, to put at least 20% down and must have a credit score over 700 with proof of their ability to pay. Those unable to meet these requirements will largely remain in the rental pool.
But does a robust homebuying flurry hurt the residential rental market? Not really, except for rentals in large cities from which people are fleeing. Amid lockdown, people learned that they can actually work from home or anywhere that has an internet connection. Productivity levels overall have increased, and parents can be home with the kids. An office space is the newest must-have for a family home.
Even after the pandemic, will workers want to go back to the office? Likely not. Months of sheltering in place have soured many on big-city living. The effect we can predict is that rents in large cities, which have historically been extremely high, will go down as inventory increases. For those who are staying in the big cities, co-living, which had become popular, may see waning interest. Co-living offers the cheaper alternative of a commune-like experience as opposed to renting an apartment and shorter-term or month-to-month leases. As rents drop and traditional apartments become more accessible, these new alternatives may lose popularity.
The commercial office space rental industry has also changed. Because of the work-at-home requirement, companies (which are often locked into long-term leases on large amounts of office space) are finding that their employees do not want to come back to the office setting. Those who do want to work in an office may be accommodated in smaller venues with meeting rooms for the occasional gathering of larger groups and space for smaller meetings as needed. Companies are needing to renegotiate leases and downsize on space while their employees continue to work from home is changing the face of the commercial office space market.
Once a viable, sought-after asset, building owners are scrambling to do conversions of office space to live-and-work or residential-only space. In addition, the days of call centers may be numbered now that we know people can actually be at home for both sales and customer service jobs. If these changes prove to be reliable and growth-oriented, the days of large rooms full of sales and customer service staff may be gone. The potential is that the cost of brick-and-mortar space for companies will decrease, thus adding a potential profit to the bottom line.
But this is not good news for the investors in those buildings, who will have to quickly adapt or die with a paucity of commercial tenants wanting office space. Smaller businesses — like accounting offices, legal groups and medical dental space, gyms and spas — will not be changed much in terms of their ongoing need for commercial office space.
Many small shops and retail outlets are suffering greatly from the lockdown. Rolling restarts and subsequent shutdowns are moving restaurants closer to insolvency. The fear is that when the PPP funds run out, it will be curtains for many of them. I have been through small towns around Idaho and see empty storefront after empty storefront. Sadly, these businesses are not coming back. Many small-town businesses were already operating month to month with little in reserve for slowdowns and simply could not weather the storm. It is not just the business owners who have lost; it is also the owners of those rental properties that are now sitting vacant. Those investors still must make mortgage, insurance and tax payments, and there is no money coming in from rents to support those cost outlays. They, too, will suffer if they cannot re-rent the spaces and make the mortgage and tax payments as required.
For the restaurants, bars, small retail businesses and large office-space holders, the near-term future is bleak — that is the bad news. Banks have not forgiven payments but in some cases have delayed them. That means that for many borrowers, large payments will be due before long. Because reopening is still not a sure thing, many will not be able to catch those payments up. Foreclosures loom unless there is a way found to give short-term support to investors with mass vacancies.
For those investors who have free cash available to invest, there will be some good buying opportunities and grateful owners who are only too willing to sell. This pandemic too shall pass, and for those who played and lost, there is hope that they can come back another day for the big win.
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