By Ian Slater | April 7th, 2020
I am writing this blog in the third week of coronavirus lockdown in New York (and for that matter, nationwide) with likely another month or so to go, and rightfully so. I have been thinking a lot about real estate investment at this time and the different ways a buyer can invest in real estate, and further to that, the different ways each investor has been affected by the lockdown and economic shift. It’s very interesting to see and also is good to study as you look to the tail end of this and how it may be best to invest in real estate during the “new normal!”
Below I’ll lay out all of the different types of investing I am privy to or have clients/friends who invest, and my thoughts on each right now and on the back end of the crisis:
High end condo ownership: I of course work in this world on a day to day basis and am lucky to count myself as the one who sells some of the best property in the world, in Manhattan and Brooklyn as well as other prime global markets. Central urban real estate that is of quality and located in landmarked (or “listed”) areas has historically been the most desired and resilient real estate in times of crisis. For those who have these assets rented out as investment properties, the likelihood that they will lose a high-end tenant because of unemployment or fleeing the city is basically nil; the tenants are simply too wealthy in most cases.
But, currently, there is the major question of the desirability of cities in the short term as psychological fear enters the market. I for one do not believe that the resilience of our major cities is at risk, and (if you read my last blog post!) foresee pent up demand on the tail end of the crisis.
The next several quarters will be strong for purchasers because there will be sellers who must sell, and because of economic volatility it is likely that pricing will be suppressed to some degree. Lack of and more development (because of development stoppages by cities) will likely over time create a pricing jump for buyers who buy in 2020 or 2021.
Development in NYC: I will discuss only New York ground-up development or conversions, because I am of course the closest to it and have the opportunity to represent some of the best developments and developers on the face of the planet. While at this exact time, the market is slow because of the fact that real estate brokers are not allowed to show except virtually, a squeeze of supply will likely result in a stable market moving forward out of the tail end of the crisis.
There are a few major caveats here in my opinion: one, it will be major for a developer to be successful here that they have a large amount of homes in contract already; if a developer is carrying financing and construction financing through this it will add much more difficulty. Two, there will be a rush to quality; buyers are going to be more focused on the best product offered. Three, we must be cognizant that buyers may want larger spaces now. Small apartments may not fare quite as well as before!
Multifamily real estate: Multifamily real estate, which is the type of investing I personally do (I’m actually sitting in one of my investment properties in Providence, RI writing this right now, where I have decided to ride out the NYC lockdown), is likely the most stable asset.
The biggest issue presented here is if tenants lose their jobs and cannot continue to pay rent, and how that will affect a landlord. However, with multifamily real estate, this risk is hedged across multiple apartments per building and it is not likely that entire assets will go underwater if they were capitalized and purchased correctly. Personally, I am seeing a decent portion of tenants not able to pay rent, all of whom I and my partner are of course working with to find the best solution. I do feel that there will be a sector of the multifamily market that is very exposed because of too much risk and too little rent coming in, which is where there will be buy-side opportunity on the tail end of the crisis. Tenants may also move out of more densely populated areas or high-rent areas if they don’t have jobs or can’t pay the prices. If you take a look at Los Angeles rents, as a random example, they dropped in March
for the first time in a decade.
However, I believe that there will be a turn of attention from stocks to multifamily real estate as a preferred asset class because of the relative stability and “guaranteed” return that multifamily real estate offers. This could in turn drive up the market when the world returns to “normal.”
Retail: Already struggling, retail was really kicked in the gut here. With major retailers across the country forced to close, many are claiming (whether truthful or not) that they are unable to pay the rent-- you are reading almost hourly of new announcements. Subway, Cheesecake Factory, Adidas, etc., have all told their landlords that they won’t be made whole on rent until the lockdowns are lifted.
Online retailers are, on the other hand, booming, predictably, with Amazon and Walmart online traffic soaring.
There are also reports of "revenge shopping
" in China, where retailers have reopened and retail purchasers are finding a true form of shop ‘til you drop therapy! So potentially, there will only be a short blip and a subsequent stabilization.
Office: Office investment is, in my opinion, the biggest conversation starter right now. With everyone forced to work from home, how will office demand change on the tail end of the crisis?
Will companies realize that potentially they do not need a centralized work space, and more employees can be effective working from home (my opinion: from pure personal experience, working from home is not super productive for me, and from articles and memes I’m seeing, it doesn’t seem to be for many other people too!)
Will the “open office” concept change and people will prefer to work further from one another?
Will companies realize they may not need to be in major cities as talented employees choose to live in other areas (also not likely, but a topic of conversation)?
Most likely: there will be a rush into newer offices with better air filtration and cleaning systems, and older offices will need more capital improvements to attract class A tenants!
: Obviously one of the hardest hit sectors right now, with hotel occupancies nationwide hovering around 22% rather than their typical 80%
, per NREI. There are endless stories of hospitality owners needing to lay off or furlough a huge amount of staff, and extremely painful stories of how badly these businesses are struggling.
This all in the face of what was, up until now, a massive growth in globalization, global travel, and luxury accommodations.
I genuinely believe on the tail end of this, as long as hospitality companies can be creative and come up with a way to prove to their clientele that they are monitoring the health of their guests, the business will bounce back and hospitality investment will be stable. There is an incredible amount of conversation about travel and desire to take trips on the back end of the travel lockdowns that I think it will likely spike back to above-normal levels.
And keep in mind, however educated anything may be here, it’s all just guesses and open conversation!