Where to look for real estate investing opportunities
Look around the nearest city and it’s likely you’ll see cranes, dozers, excavators, and other construction equipment in action. The suburbs are swelling, and new homes are popping up everywhere. Industrial and multifamily residential buildings are in high demand, and alternative properties like self-storage and student housing are increasingly attracting investor interest.
Since the pandemic began, real estate investors are re-evaluating old norms and finding new opportunities. Several emerging trends could continue to move the needle in their favor
Investors are showing an increased appetite for risk as they aim for higher returns. For example, the share of investors seeking “opportunistic and distressed assets” increased to a record 29%, up from just 16% in 2020, according to CBRE’s Americas Investor Intentions Survey. Several factors are contributing to this increased risk tolerance, including an economic environment that is normalizing, government stimulus support, and plentiful low-cost capital. These opportunities are hard to find, however, as there are few distressed properties left in the marketplace.
The Sunbelt is hot. Atlanta and Miami ranked sixth and seventh in the top 10 preferred metro markets for real estate investment, according to CBRE. And in what PwC refers to as the “Great American Move,” Southeastern cities like Nashville and Tampa/St. Petersburg (and their suburbs) are “in-migration” markets, due to affordability, demographic and consumer shifts, and ample job opportunities.
Appealing to both consumers and employers, secondary markets like Birmingham, Charleston, Chattanooga, Greenville, Knoxville, and Memphis are also trending high for overall real estate prospects.1
With its pleasant climate, the “Sunshine State” of Florida, including Miami, Tampa, and Jacksonville, is expected to experience job growth well above the U.S. average.2 Florida ranks fourth in the Tax Foundation’s “State Business Tax Climate Index,” making it a very attractive place to do business.
Participating in social change is important. Along with the global pandemic, 2020 was a year of social change in the U.S. environmental, social and governance (ESG) and diversity, inclusion, and equity (DEI) initiatives gained strength for all industry players, including investors.
Fifty-six percent of CBRE’s survey respondents have already adopted ESG criteria as part of their investment strategy. Another seven percent plan to do so in the next three to five years.3
Respondents to the PwC survey are specifically interested in diversity, stating that investment managers of color should be a priority. Many existing programs are encouraging investment in minority neighborhoods, and several others are in the works.
What can we expect for commercial property types?
There’s still uncertainty about the future of commercial property. But we can make some solid assumptions based on current movements.
Demand for office space will continue to decline.
The last two years radically changed how employers, employees — and of course, investors — think about office space. More than half of CBRE survey respondents believe that office demand will decrease slightly over the next three years, while nearly 30% believe it will drop significantly.
Of course, the popularity of working from home at least part of the week will likely change how — and how much — office space is used. Over 90% of PwC survey respondents agree that “in the future, more companies will choose to allow employees to work remotely at least part of the time,” likely resulting in less demand for office space. It is important to note that most companies began efficiency exercises designed to lower occupancy costs after the Great Recession, so demand was trending down before the pandemic. Ironically, social distancing and proximity issues may limit the loss in demand as area per employee increases.
e-Commerce is driving investments in Industrial & Logistics properties.
Over 40% of U.S. consumers receive at least one Amazon package per week.4 That’s a lot of commerce and it drives a lot of industrial and logistics (I&L) real estate investment. Indeed, I&L properties were among the most preferred by U.S. investors. Prologis Research suggests that a combination of e-commerce demand and higher inventory carry may increase logistics demand by 400 million square feet over the next few years. Volume and pricing for industrial increased 10% year over year in third quarter 2021.
Multifamily is an attractive option.
Where there once was concern that multifamily could be hurt by mass evictions, now there is an expectation of expansion and profit in the sector. Nationally, rent growth is up just over eight percent (8.3%). Southeastern figures are much higher with Tampa, Atlanta, Jacksonville and West Palm Beach posting year over year increases of more than 10%.5 Year-over-year growth in the sector was a whopping 12%.
There’s hope for hotels.
The travel industry is hopping as more destinations open and vaccinated people feel safer vacationing and traveling for work. Occupancy rates increased the highest they’ve been since October 2019.
Vacation rentals are profitable, but business rental could prove challenging. Deloitte suggests corporate travel will likely increase in the second half of 2021, but not enough to return it to pre-pandemic levels.
Retail will continue to falter.
While store closures have slowed, they were still high at 4,626 as of June 2021.6 But as consumers are feeling more confident about pandemic responses they are returning to stores for shopping and social interaction, which could bode well for in-store sales.
Positive news for retail is that the U.S. Commerce Department reported retail sales rose by a seasonally-adjusted 0.6% in June versus the month before, surprising Wall Street analysts.7 With schools opening across the country, back-to-school spending should fuel more retail growth. A recent Deloitte survey on back-to-school spending estimates spending per child to rise from $529 per household to $612, a gain of 15%.
Investors are still wary of the retail sector in general, accounting for less than 10% or overall CRE investment in second quarter 2021.
Optimism outweighs uncertainty.
To what extent will demand in commercial real estate continue? It’s difficult to say. Many factors will determine what’s ahead, including debt levels, inflation, government policy, and an affordable housing crisis, among other uncertainties.8
In addition, industry watchers point out a current “disconnect” between buyers and sellers. For example, 70% of CBRE survey respondents plan to buy 20% more real estate than last year, but 30% of survey respondents plan to sell 20% more real estate than last year. This will drive real estate prices even higher.
Industry insiders are crossing their fingers that these predictions will indeed come to pass.
Contact Synovus Banking or your Relationship Manager for more information on commercial real estate.
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