Real estate is different, not dead Real estate is different, not dead http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\neighborhood-real-estate-small.jpg February 17 2021 January 21 2021

Real estate is different, not dead

How Covid is spawning changes and accelerating trends in the sector.

Published January 21 2021
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It may take years to sort out the full ramifications of the Covid-19 pandemic on the real estate sector, where stories of empty offices, shuttered retailers, vacant apartments and capacity-restricted restaurants remain in the news, along with continuing government-mandated lockdowns, travel restrictions and eviction moratoriums. But despite the overwhelmingly dire outlook of the bears, we think the sector could well make a positive contribution to the recovery this year as it moves into the final of three distinct stages caused by the virus.

Stage One was all about all things e-commerce. From data centers and cell phone towers to retailers working to solve the “last mile” distribution challenge, the merits of shopping and working in a quarantining world fed a surge in demand for properties that facilitate online communications and delivery. The volume of goods traveling through warehouses increased dramatically as the country adapted to a shelter-from-home world. Big box stores and outdoor shopping centers moved rapidly to facilitate BOPIS (Buy Online Pickup In-Store) and so-called contactless delivery. Even at home, dining and living rooms transitioned into offices and classrooms as parents worked remotely and children went to school via laptops or the family PC.

Stage Two was the return of the suburbs. The reality of cramped apartment living without outdoor space, the loss of such unique attributes as culture, a favorite eatery/pub and “live” sports that make city-life appealing and a rational phobia of public transit complicated urban living during Covid. This led to a rush to suburbs and even exurbs, where space and living options are far more plentiful, apartment rental rates more reasonable and homes with yards and even a garage abound. Abetted by record-low mortgage rates, this shift saw existing home sales surge late last year at their fastest pace in 14 years, and December single-family home starts also jump to a 14-year high.

Stage Three has only just begun. As vaccinations become more widespread and life starts to return to normal, we see three areas of the real estate market potentially benefitting:

  • Single family homes Elevated demand is likely to continue as both employees and employers recognize the merits of working from home, even if on a more limited basis. For employees, the lack of a commute is an obvious plus in terms of both time and cost. For employers, the reduced necessity of providing office space for every employee all the time, along with the possibility of locating some groups into lower cost-of-living geographic areas, offer the prospect of expense reductions. Moreover, that second home that was of use only on weekends or during vacations suddenly has much more utility—and value.
  • Business and leisure travel With the quarantine experience leaving everyone stir-crazy, it’s only a matter of when, not if, leisure travel experiences a jump. Large group meetings and conventions likely will take longer to recover. They are at the mercy of jurisdictions lifting restrictions, business managers becoming comfortable with the potential liability issues and employees’ willingness to participate. But when starting from zero, any incremental restoration of these activities will represent an immediate boost to travel and hospitality businesses that saw their revenues evaporate, as well to the many municipalities that depend on the tax dollars business and leisure travel generate.
  • Office market Intuitively, it’s hard seeing this segment contributing to growth anytime soon. Confronting the challenge of making employees comfortable with returning to work, office tenants will need to make substantial investments to upgrade and modernize air systems, elevators, traffic flow and overall designs. Say goodbye to the trend toward densification and the ubiquitous mid-floor “cube farm” and hello to such new buzzwords as “segmented neighborhoods” and “collaborative interactive space.” For office landlords, the need by tenants for more space per employee could mitigate some of the negative impacts from any reduction in on-site employees.

In short, while the disruption to real estate markets brought on by the pandemic has been nothing short of devastating, the path forward to a new and in some cases revitalized future should add to the economy’s recovery. As some property types battle obsolescence, others will require significant inflows of capital aimed at reshaping their operations for a post-Covid world. Think of it as a form of creative destruction on steroids, accelerating trends (online shopping, remote work, decentralized operations) and creating new opportunities in a dynamic real estate sector.

Tags Coronavirus . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Investment in real estate involves special risks such as limited liquidity.

Federated Global Investment Management Corp.

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