Joel Baxley
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We spoke to a team from RSM about how the real estate industry is emerging from the COVID-19 crisis, and what will drive its growth in 2021
We spoke to a team from RSM about how the real estate industry is emerging from the COVID-19 crisis, and what will drive its growth in 2021
As the economy has adapted to COVID and deal activity has begun to thaw, which investors and property types are seeing early activity?
There is a lot of dry powder on the sidelines; non-US investors are going to come in while the domestic groups figure out their next move. One source of capital we expect will be offshore high-net-worth families investing in luxury properties in large metropolitan areas, to place their children in US schools, or for other personal and financial reasons.
We’re also seeing greater interest in industrial properties, such as large warehouses. Even pre-COVID there was strong demand for these assets along the Eastern Seaboard, where Amazon and other big distributors were pursuing opportunities. COVID just pushed that further along.
How have market participants adapted to the COVID world?
Initially, COVID made it very difficult to go and look at properties. By early summer, we established safety protocols and now we're fairly comfortable with the procedures. While we may not be sending the number of people we used to, enough are able to be present on site when needed.
Aside from due diligence, however, deal negotiation is still slow for clients. People have historically preferred negotiating in person as opposed to video conferencing, but it’s now easier for those in a hurry to transact. For the less distressed and more complex transactions, it’s been slower to catch up. Foreign buyers, despite being eager to invest, have been impacted the most by travel restrictions.
Over the long term, COVID protocols will have a lasting effect on business travel. A common question this year has been what will and won’t go away after the pandemic. One thing that is likely here to stay are virtual meetings. Everyone became comfortable with video videoconferencing services because they were forced to, but the benefits were soon apparent. It saved everyone a lot of time and money.
Assuming an uneven recovery, what will be the near- and long-term path to a quick rebound?
The biggest short-term driver of transactions will be the regionalization of activity. There are going to be winners and losers in all sectors given local jurisdictions. While the new administration’s COVID response will have a broader and more even impact, state lockdowns will impact how areas of the market can recover.
From a longer-term perspective, there are economic pressures that are going to flow through the system as government funding shifts from stimulus relief to infrastructure spending. This will drive opportunities in localized assets like affordable housing or other infrastructure projects.
Retail is the obvious industry that is going to have a longer path to recovery. Online shopping and its ease of use was already having a devastating impact on the industry and the pandemic accelerated that trajectory. That said, brick and mortar still has a place. But, like business travel, it will look different. Some retailers are beginning to merge spaces or bring in other businesses with more brand recognition to create a mutually beneficial relationship. These innovations, however, can only take the industry so far, and retail is going to stay behind and continue to lag.
What tailwinds and headwinds can private real estate expect in 2021?
We see tailwinds in market participants adapting to the new conditions and the amount of dry powder at their disposal. In the expectation that frozen market valuations are now about to thaw, investors are looking for opportunities. There's still a significant amount of money on the sidelines, and investors and their clients are going to be itching to find a way to deploy those funds, especially when you have distressed funds that were created to purchase property and the capital is not being deployed.
One sector mentioned above, affordable housing, is suffering from a lack of supply. There’s more demand than supply which will naturally raise rents and create a difficult situation for households in need of housing. Behind this headwind, the regulations in place to build an affordable housing unit in the US make the cost per unit much higher than on the private side, creating a cost/benefit issue for investors. That said, the new administration could bring about some positive changes here: affordable housing reform and updated regulatory changes would give developers a big tailwind.
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