Real estate is one of the industries leading the COVID-19 economic recovery, but that industry resurgence is not universal.
“Shutdown and strong snapback have occurred in certain real estate sectors. Others are still in survival mode and recovery mode,” said longtime real estate investor Greg Winchester.
Winchester, instructor in Auburn’s Master of Real Estate Development (MRED) program, has over 35 years in the banking and commercial real estate/lending investment industry, He’s been involved in the portfolio management of more than $225 billion in loans and real estate investments throughout his career.
An acute observer of how the COVID-19 pandemic has affected the real estate industry in its numerous sectors, Winchester offered some insights to a breakdown of the current real estate outlook as we begin to emerge from the pandemic.
And the outlook is not as dismal as it might seem. In fact, one real estate sector is flying high right now—industrial.
“The acceleration of e-commerce and the best market ever for industrial/distribution and development will provide tremendous tailwinds for the next few years,” said Winchester, who is also head of industry and alumni relations for MRED. “America has led the way on this type of development, but now it is going global as e-commerce spreads globally, to Europe, Asia and beyond.”
Shortage, demand and transformation: single-family homes
Perhaps no other real estate sector has garnered as much widespread attention during the pandemic as single-family for-sale homes. And now, a tremendous national shortage is only getting worse.
“Pent-up demand is increasing as millennials desire to purchase homes with the current low mortgage rate environment,” Winchester said. “Homes in major resort areas are selling like hotcakes as boomers retire and leave major urban centers.
“The main issue is affordability and how to address the large demand for both existing homes and new homes. Developers and design professionals are working on creative solutions to address some of these problems.”
COVID has caused housing to be viewed as more than shelter as consumers have also begun to see their homes as a place for remote offices and schooling. As this sector recovers, he said, the design of new construction will attempt to address these issues for the future, and the desire for green space—whether urban trails or neighborhood parks—has become a critical amenity for future developments.
A tale of two sectors: Apartments
In urban areas, mid-rise and high-rise apartments have been challenged, particularly in major gateway urban areas like New York City and San Francisco.
In the suburban and secondary markets, garden apartments are flourishing in the high-growth Sunbelt markets. Stacked with amenities, affordable and placed in highly desirable areas, these units are in high demand.
But affordable Class C apartments—those over 20 years old, in less than desirable urbanized locations and in need of renovation—have suffered due to job losses and migration, but in other markets are highly occupied due to the lack of alternative affordable housing. Traditionally, minority populations have borne the brunt of these trends.
But with recovery comes encouraging news in this sector: In February, Chase Bank doubled its Chase Homebuyer Grant to foster home ownership among Black and Latino communities. Qualified homeowners can now receive a $5,000 grant when buying a home through the bank.
What will become of office space?
Initially, office owners and developers felt that the impact of COVID was only temporary and that eventually tenants would call employees back to the office.
“However, as time has gone on, the outlook for office space has become more clouded,” Winchester said. “While many foresee the march toward urbanization continuing after the pandemic, the way in which firms and employees will approach office space will change.”
He said densification of office space appears to be decelerating or reversing and decentralization of office space locations may occur. In addition, employee and building safety concerns have become a priority.
“Suburban and lower-density office buildings may become more appealing. Major firms will struggle to find the right balance between employee flex schedules for in-the-office workdays and remote working days, plus they must address whether to increase to more multiple locations versus one highly centralized urban location.
“While it’s unquestionable that the value of collaboration in the office will be needed for corporate and career success, the types, designs and locales of office space will adjust to the new post-COVID world.” Winchester said.
As the workplace recovers, the office as we’ve known it is looking a lot different. An October 2020 Gallup poll showed that nearly two-thirds of remote workers would like to remain away from the office, but experts point out that the office has not gone away, and in some cases may be more needed than ever.
Carmen Perkins, executive vice president of Civitas Commercial Real Estate Services LLC, in Washington, D.C., is one of the proponents of the new, evolved office space that focuses more on creating and representing a culture’s company.
“The future of the office market is productivity,” Perkins told Fortune. “The location of the office space may not change much. It’s the utilization of that space that changes.”
Some physical spaces have become breakout rooms and gathering spots to serve the office’s primary missions: training, team building, onboarding and collaboration.
Hospitality: new options and outlooks
Of all the major property sectors, hospitality faces the most challenges during recovery.
Properties that serve the transient sector—guests who are on the move, not part of a larger group and plan shorter stays—have started to slowly recover. As things reopen, the resort/transient sector may recover very sharply due to pent-up demand.
And these properties are ready: The sector has accelerated its property technology to address both the falloff in demand and the new requirements for public health and safety.
Hotels that are tied to the business travel sector have been hit especially hard and are in for a long recovery process. Their corporate executives are examining the impact of communication technologies such as Zoom and Teams, as they have affected the way different businesses meet—virtually or at the hotels they had traditionally frequented.
With that as an unknown, hotels that cater to business travelers have sought new creative ways to attract customers and alternative uses.
In London, some high-end hotels are offering one-day stay packages to weary workers eager to leave the confines of their homes. Some resorts, including The Atlantis in the Bahamas, allow travelers to follow a protocol: Test negative for COVID and then make the trip within three days. The result: a deluge of healthy guests eager to travel at long last. And a huge reopening for the resort.
Another way the hospitality industry is recovering despite massive setbacks is the rise of the “ghost kitchen.” The rarely used or even shuttered kitchens of large facilities such as hotels or conference centers are leasing space to meet the exploding delivery demands that independent restaurants face.
The otherwise vacant kitchen becomes a hub for multiple eateries to prepare their delivery orders and send them off.
There are an estimated 1,500 ghost kitchens in the U.S. and more than 7,500 in China, the Wall Street Journal reports, adding that analysts predict by decade’s end, ghost kitchens could be a $1 trillion industry.
Companies including Kitchen United, Reef Technologies, Zuul and Cloud Kitchens have raised hundreds of millions of dollars combined and have attracted local and national brands into their facilities.
It’s a promising example of the recovery generating the exponential growth of new sectors of the industry.
Retail: Embrace the new reality
COVID pushed forward a lot of ongoing trends in all manner of businesses. In retail real estate, the pandemic accelerated the creative destruction of certain retail tenants.
Retailers with existing and growing omnichannel retail strategies—stores such as Walmart and Target, which have well established online ordering, pick-up and delivery services—have flourished. But traditional brick-and-mortar retailers, already in decline before the pandemic, have been decimated.
But in recovery, as re-openings occur, the surviving retail tenants have a chance of recovering when they begin to embrace the new reality of becoming more innovative and creative to reach their consumers, Winchester said.
For many malls across the country, there is no recovery. Already in steep decline before the pandemic, they have become obsolete. Still, some high-quality trophy malls are continuing toward high-quality, major mixed-use developments.
During recovery, new innovative retailers are emerging, ones that Winchester said will better serve and address the demands of the digital economy.
“Adaptive reuse of obsolescent retail properties and centers will result in everything from total demolitions to alternative uses to major repositionings,” he said.
It’s just one facet of the ever-evolving real estate landscape in the time of recovery.
Pandemic Pushes Industry Trends
As the real estate industry recovers, Greg Winchester said the pandemic has caused eight major trends to accelerate. The shifts now underway are:
1. Acceleration of the impact of technology and the new digital world on real estate: Those who adjust and adapt will thrive.
2. Greater attention to customer demands in terms of health and wellness.
3. A revisiting and improvement of the amenities available to customers for green space and outdoor recreation.
4. A pause on major urbanization of gateway cities and a reset in values for a period.
5. An acceleration and growth in valuations of real estate in the Sunbelt and Rocky Mountain areas, which have growing populations, a pro-business environment, attractive young talent pools and a lower cost of living.
6. A dramatic increase in innovation in all property types which will serve customers better and more efficiently. More customer-friendly and flexible uses will evolve.
7. More environmentally sustainable properties with rich amenities and greater energy efficiencies. Major investors will demand properties which can suit their environmental, social and governance, or ESG, requirements.
8. A focus on more affordable housing which can serve all the essential needs of homeowners in the digital world. Governmental and nonprofit incentives for affordable housing will accelerate and large corporations will invest more in affordable housing. The need for affordable housing will drive greater demand for manufactured housing, for-rent residential homes and adaptive reuse of commercial properties to housing.
A (sometimes misguided) Frenzy for Homes
Pre-COVID, the wildest real estate bidding wars used to be in cities like New York and San Francisco, with 20 to 40 buyers bidding on a property, said Glenn Kelman, CEO of online real estate brokerage Redfin.
Housing sales in smaller cities and rural areas were sluggish, and millennials didn’t seem interested in buying houses, Kelman told NPR’s The Indicator.
And then from May to June 2020, as the pandemic forced millions of people into unemployment, the National Association of Realtors announced that pending home sales rose more than 16%—the highest monthly rise on record.
“It’s white-collar professionals who are able to work from home,” Kelman said. “In some ways, this is a sign that the economy is just officially split in two. You have people who are worried about unemployment benefits running out, and at the same time you have other people who are able to work from home and thinking about the home all the time. And that’s where they want to spend their money.”
But although the rush spurred bidding wars, reinvigorating real estate markets nationwide, it had its downsides. A recent Wall Street Journal piece focused on homeowners who rushed to buy during the pandemic and later came to regret it. Would-be homeowners were so panicked about winning the bidding wars that they “got crazy,” one Hamptons real estate agent said, adding that many first-time buyers disregarded the huge commitment and due diligence involved in the process.
Eager to win and get into their new homes, many waived inspections. After move-in, many hasty purchasers encountered the unexpected—wasp infestations, devastating neighborhood—wide woodpecker damage, even toxic black mold.
But the impulsive allure is still out there, at least in pop culture.
In a Saturday Night Live segment, a steamy, suggestive mock ad for the real estate site Zillow depicted millennials ogling images of homes for sale, noting their seductive listings— “an updated colonial with mature landscaping,” one thirtysomething exclaimed as he perused the site alone at night, in his bedroom.
Social media reactions to the video flooded in.
“This is legit,” said one commenter. “This is how I actually ended up buying my house during quarantine.”
