By Strategic Passive Investments
The COVID-19 pandemic has changed a lot of things over the past year, and the changes are not done yet. It can be tempting for real estate investors to assume that things that changed during the pandemic are likely to be more or less “permanent,” but this is dangerous thinking. While it is important for investors to look forward and stay ahead of the curve when it comes to housing trends, many changes that manifested during the pandemic might not be as lasting as they felt like they might be prior to the national introduction of the COVID-19 vaccines. If America truly returns to “normal,” then a lot of the trends currently dominating housing will be as fleeting as fashion fads often are. Over-reliance on the longevity of trends in your real estate investments could leave you with over-priced properties on your hands.
Here are three trends economists are hesitating to consider permanent shifts in preference post-pandemic:
1-The Home Office Trend
In 2020, the terms “remote work” and “virtual school” became commonplace. Families fortunate enough to have jobs that they could do from home struggled to find places in which to get those jobs done, while students and teachers struggled to learn and instruct from bedrooms, front porches, and kitchen tables. Not surprisingly, the availability of a spare room that could be dedicated to working, learning, or both became prized, leading real estate agents everywhere to begin highlighting the presence of such square footage in listings. However, just because these properties and their much-touted spare space have gone for record-setting prices in 2020 does not necessarily mean the home office trend will become a permanent fixture – especially not across all price sectors of residential real estate.
Daryl Spradley, senior vice president at Charles Wayne Consulting, said the current upsizing trend largely accredited to the need for home-office and home-schooling space is not necessarily going to become a permanent fixture in the landscape. Spradley explained in an interview with RentCafe the trend is actually fueled more by “digital nomads” who prefer to work remotely and not buy a home, meaning that once more companies require their employees to return to work the demand for such spaces – especially in rental properties – could decline. Furthermore, this demand is likely to “stick” in higher-income rentals simply because the majority of jobs that allow for remote work have salaries nearing or in excess of $100,000 annual pay. Lower-income rentals with home office or home-schooling space are less likely to pay off in terms of higher rents and demand because tenants are less likely to be in position to make use of that extra square footage as it is intended.
2-The Great Urban Exodus Trend
Several years prior to the pandemic, the term “urban exodus” had begun to enter real estate conversations as millennials began to age into the period in their lives when they began to get married (albeit belatedly, compared to previous generations), have children, and start valuing the local school system over walking distance to bars and nightlife options. COVID-19 certainly accelerated departure from cities, especially as more Americans began to place an increasingly high value on private space for outdoor living and the ability to “hang out” at home without hanging out on top of other family members.
However, wrote Bloomberg contributors Marie Patino, Aaron Kessler, and Sarah Holder, the urban exodus is really more of an “urban shuffle” that has certainly manifested in rising home values in metro-area suburbs but has not, as some predicted, led to gaping, empty multifamily communities across the country. “Data shows most people who did move [out of a city] stayed close to where they came from – although Sun Belt regions that were popular even before the pandemic did see gains,” the trio observed. The Sun Belt is officially defined as the area of the United States stretching from the southeastern U.S. to the southwestern U.S. The takeaway here is not that rentals are becoming obsolete but that rentals in proximity to urban centers – either in suburbs of those centers or within a few hours driving distance and located in an attractive vacation destination such as a beachside town – are going to be the most in-demand housing options when the dust settles.
3-The End of the Individual Landlord
As soon as the stay-at-home orders went out across the country, landlords and tenants knew that they could be in for a tough time. When eviction bans and foreclosure moratoriums became a health-policy issue as well as a public-policy one, landlord associations around the country steeled themselves for vilification and, in many cases, bankruptcy. Sadly, the pandemic has brought out the worst in certain residents who have worked the system and even blatantly refused to apply for rental assistance that would have helped their landlords maintain properties and avoid foreclosures (that were, by the way, not prevented by moratorium).
Despite these trials, however, the COVID-19 pandemic has not heralded the end of individual landlords or sent rental rates plummeting into an abyss from which they will never recover. Actually, multifamily rent rates increased year-over-year as of May 2021 (by 2.5 percent) while single-family rental rates rose by 7.3 percent during that same month, according to Yardi Matrix, which has finally begun tracking single-family rentals (SFR) as an asset class. While institutional investors have weathered the pandemic storm better than many individual landlords, the mom-and-pop operations are still in business and, in many cases, were able to work more productively with their tenants than were their institutional counterparts. The struggle is not necessarily over, but we are looking at a stronger-than-ever SFR market filled with opportunities for real estate investors.
Past Pandemics Hold Clues for the Future
Tracking these types of trends is important work for real estate investors, but jumping on board with all of them may not be. Probably the best thing a real estate investor can do when tempted to go “all-in” on a new trend like the home office or increasing square footage is to take a minute to get some historical context and perspective. Take, for example, the next-most-recent widespread novel coronavirus epidemic that affected millions of people: the SARS epidemic in China that emerged in November 2002. Now, admittedly, this was not a global pandemic. It remained largely contained in China although some scientists insist on referring to it as a “mini pandemic” because it did end up affecting scientifically significant populations in China, Hong Kong, Taiwan, Singapore, and Canada. However, China remained the epicenter of the outbreak, and about a fifth of all infected in other countries were healthcare workers.
Unlike COVID-19, SARS remained largely contained and resulted in “only” 774 deaths of the roughly 8,100 people infected around the world. It is important to acknowledge that these viruses, while related, are not the same. However, both pandemics have displayed similar traits so far in their tendency to manifest in waves (regionalized spikes and declines) and, according to many scientists, in their relative susceptibility to what are referred to as “19th-century transmission control methods” such as distancing, isolation of the infected, and (yes, I’m going to say it) masking. Both COVID-19 and SARS did not display marked evolution in terms of transmission methods, although some strains of COVID-19 are certainly more virulent than others.
If Americans are able to exert some degree of control over transmission in a relatively predictable fashion – be it through old-fashioned methods or newly developed vaccinations – then it is possible that many homebuyers, renters, and investors will insist on returning as completely to a pre-pandemic normal as possible. In that event, strategic changes to incorporate pandemic-related “trends” into your real estate investments will only improve your bottom line to the extent that they piggy-back on pre-pandemic trends or add to the desirability of a property despite the strange experience of 2020.