How US real estate investors can find opportunities in the pandemic
Michael Crow, founder & chief executive of Dunross Real Estate Corp, based in New York
We know real estate to be a safe investment, but is this still true even during a pandemic?
When our economy is put under immense pressure, we assume that every industry will flounder until things turn around. When we consider the impacts of the coronavirus, this seems to be true. Millions of Americans have lost their jobs since the beginning of the year. Businesses have been struggling to operate under new guidelines, with many being forced to close their doors forever.
As we watch people and industries struggle in the wake of COVID-19, we think we’d be watching the same circumstances play out in the real estate sector. But this isn’t necessarily the case. Even during the last five recessions we’ve been through, home prices have actually increased during three of the five downturns. While real estate hasn’t been hit as hard by the pandemic, it’s still experiencing its fair share of challenges.
Because of the pandemic, consumer confidence is particularly low, which means buyers aren’t necessarily vying for the purchase of a new home right now. Even if they were, mortgage lending standards have changed in response to the virus. The minimum requirements for credit card scores has increased, as have the down payment percentages of mortgage loans. Even standard procedures such as home tours, inspections, and appraisals have all become more complex because of the virus.
Despite these unprecedented times, this is a time for real estate investors to thrive. Is there uncertainty and risk? Of course, but this is always true. With a strong real estate investment strategy in place, you’ll be profitable now and on the other side of this pandemic.
Target distressed properties
During a recession, it’s common to see a spike in foreclosures, short sales, and distressed sales. When the economy is in a tight spot, so is the rest of society. 32% of households couldn’t afford to make their full rent and mortgage payments this month. 19% of Americans made no payment at all, while 13% only paid a small portion of their bills. If tenants can’t pay their rent, landlords can’t make their mortgage payments.
And this doesn’t just affect individuals. Business owners are also struggling to afford their office spaces. Within the past few months, almost half of commercial retail rents went unpaid.
The next few months, and possibly years, will be the perfect storm for distressed properties. This depends on how long the pandemic lasts, of course, but there are various sectors that real estate investors can look into.
Office spaces, short-term rentals, and multifamily complexes will likely all experience high distress rates, while also still being in high-demand. The same is true for hotels and retail spaces as well. Target these areas, because it’s likely there will be a high need to sell with a willingness to accept discounted offers.
Invest in real estate that’s still in high-demand
While distressed properties are a lucrative investment opportunity, real estate investors can still look at sectors that are experiencing high-demand even despite the pandemic. While the economy has been pretty grim these past few months, there are businesses who have not only survived, but have even experienced an increase in profits since the outbreak.
According to BofA Securities, the five real estate investment trusts (REITs) that have been identified as either being immune or stand to benefit from the pandemic include: data centers, grocery-anchored retail centers, healthcare real estate (specifically medical office buildings, hospitals, and life sciences), self-storage, and wireless infrastructure.
Not only will these investment decisions diversify your portfolio, but they will put you in a better position for long-term success.
Choose a strong market
Even before the pandemic, real estate investors would analyze a market by looking at its job growth, affordability, and population growth. Are these trends still indicative of a strong market now? Yes, but it’s important to understand the distinct impact COVID-19 has had on these trends before investing in property.
If a certain area has dipped significantly since the beginning of this year, it’s a sign that the market will have an even more difficult time recovering once the outbreak subsides. I’ll use North Dakota as an example. They’re still recovering from the oil collapse that happened in 2015, and now the coronavirus is causing even more damage to their economy. In other words, not an opportune time to seek an investment in that specific market.
But this is the information you should be considering before you invest in real estate in a certain area. It’s also important to research areas that will attract the jobs of the future. Sectors like technology, education, and biotech are continuing to grow and advance. Where they go, you should follow.
Our society has never traversed an economic crisis quite like COVID-19 before, but there are unique opportunities for real estate investors who are willing to look and put in the work.