Take a look at current US housing trends, and you’ll see a highly encouraging picture:
With low inventory and even lower interest rates, yet peak demand, houses are selling rapidly at above-list prices across the nation.
It might seem as though the real estate market has managed to escape the economic fallout of the global coronavirus pandemic.
But that’s only half the story.
Residential real estate might be going strong, but commercial real estate has been struck hard by Covid-19.
Right after a bleak Black Friday — which had more consumers surfing the web for deals than pounding the pavement — it’s not hard to understand why.
Commercial real estate establishments are struggling with three distinct challenges:
- Depressed foot traffic: As infection rates rise, many people are afraid to hit the mall, to go to the bank, or to see their doctor because they don’t want to be exposed to coronavirus. With fewer patrons buying their goods and services, some commercial establishments are struggling to cover their basic expenses.
- Unpredictable government regulations: As states scramble to control viral spread, rules and regulations about which businesses can operate and for which hours can change on a whim. This makes it extremely challenging to forecast, to order supplies and inventory, to staff appropriately. And because fewer businesses are open and so many are working from home, there’s a ripple effect on essential establishments that have been allowed to keep their doors open. For instance, who will order a catering lunch, when the staff meeting’s been moved to Zoom?
- Economic uncertainty: People at all levels of the buying chain are feeling the pinch. They’re putting off unnecessary purchases, waiting it out if possible. That includes commercial owners and developers.
“There are still transactions going on, but they’re at about 20 to 30 percent compared to last year,” says our Principal, Sholom Jacobs. “People are proceeding very cautiously. They don’t know: will people come back to this mall? To this convention center? Will this city get shut down for a few months or even longer?”
Despite the general slowdown, here at JREA it’s business as usual. We’re concentrating on managing our current holdings, continually assessing where and how we can create more value during this time. And we’re also raising new capital, networking with brokers and banks, and keeping a watchful eye on the market. Because despite the reigning pessimism, there is opportunity in a pandemic-plagued market.
“Similar to 2009 — the plunge of the real estate market — the coming months are an opportune time to invest, if the conditions are right,” explains Sholom Jacobs. “You have to do your research and make a calculated decision about how the investment will rebound and whether you can afford to hold onto it until it does.”
The question is where. Which markets are ripe for these opportunities?
RETAIL
Although some malls and shopping centers are thriving, many are experiencing lower revenues which means they won’t be able to meet their expenses. As a result, banks will be looking to unload a lot of defaulted loans. For discerning buyers, properties with tremendous potential ROIs will become available for significantly reduced costs and favorable terms. The key will be ensuring sufficient capital to cover costs until the market turns around — plus cutting those costs through strategic moves.
HOSPITALITY
Tourism and most business travel are at a standstill, leaving hotels and motels with empty rooms and unpaid bills. As with retail, it’s the perfect time to invest in a distressed property at a good price, if you have the capital to carry it through to better times.
OFFICE
In this work-from-home climate, previously bustling urban office spaces have gone quiet. Some have been reduced as low as 15 to 20 percent of occupancy. With high supply and low demand pushing prices down, businesses who have been renting can finally afford to purchase their own spaces. They may even be able to invest in a larger building and create additional revenue channels by renting them out.
Within each of these categories, location is critical.
“Suburbs — near the cities but not in the cities — are the place to invest,” says Sholom. “Because people are not going into the city to work, they’re running errands closer to home. They’re patronizing the dry cleaners, the coffee shop, the drugstores closer to where they live.”
The result is another surprising trend: coworking spaces flourishing in small towns and suburbs. “People need a quiet spot to work, away from distractions, but they want to be near their homes,” explains Sholom.
What does this mean for the future of cities? Will they have a comeback?
“I believe they will,” says Jacobs. “New York City will always be the Big Apple. Cities will always have that allure which draws people — and investors — in. But it may take some time. And even after the dust settles and life returns to something resembling pre-corona times, it won’t be the same. People have discovered the perks of working from home, of living outside the city, of shopping and running errands locally. We predict suburban real estate will remain strong for a good long while.”
