How the COVID Recession Shaped Real Estate

by admin | August 11, 2022 | Real Estate

Failure to contain COVID-19 led to a global pandemic in 2020. To curb the spread of the disease, governments worldwide imposed lockdowns and stay-at-home orders.

In the following months, vacant office buildings, dead silent bars and restaurants, and empty shopping malls became symbolic of the limited interactions and social distancing.

Consequently, that led to a global economic crisis, with real estate one of the worst hit industries. In 2020, home listings dropped by 40%, while places like New York witnessed a 58% drop in pending home sales.

In 2021 however, housing prices rose, reaching 19.3% in July. That kept rising until the median home prices hit an all-time high of $405,000 in March 2022. So, here’s a look at how the COVID-19 pandemic shaped the real estate industry.

Home prices continue to climb

Projections of the US home prices expect it to climb by up to 16% over the next year. Homes are nearing half a million dollars, and buyers are pulling out of the market. By the end of June 2022, mortgage applications dropped to the lowest level in 22 years.

The housing market change depends on the economy and consumer habits. There are currently signs of a weakening economy, as the country’s GDP has declined for the past two quarters. Economists suggest that the lower GPD is a sign of a looming recession.

The Mortgage Bankers Association (MBA) suggests a 50% chance of the U.S economy tipping into a recession within the next 12 months. On the flip side, consumer spending and the job market are still strong, muddying the projections of an incoming recession. All these factors contribute to higher home prices.

Higher investor interest

Real estate is one of the biggest targets for investors in private wealth, private equity, and institutional investors. Investors are looking to add hard assets to their post-pandemic portfolio.

According to Preqin, fewer than 500 institutional investors account for 84% of all real estate investments. That presents a problem because they can withstand the shocks of a downturn in the economy and keep prices stable, even in their currently inflated state.

There is a lot of competition in prime assets in segments like multifamily, commercial real estate, data centers, and logistics. The low supply of new buildings in specific markets due to the pandemic’s impact on construction exacerbates the situation.

However, interest in the real estate market has diminished thanks to measures to curb rising inflation. The Federal Reserve announced an increase in its key interest rates by 0.75% in July 2022, affecting investors’ ability to get a loan.

Navigating increasing uncertainty

Real Estate Private Equity (REPE) funds and Private Equity (P.E.) firms are in a better position to invest in real estate assets. These firms purchase and develop properties and later sell them for profit. This comes in handy post-Covid-19, where many real estate assets need repurposing and redevelopment.

Given that there was no extensive prior data regarding the impact of a global pandemic on real estate, it is challenging to determine core business aspects of investment targets. Data-driven investment analysis is necessary for optimal business during uncertain times.

Investors must also have access to informed guidance and marketplace insight. Because Covid-19’s effects varied across countries and regions, having insights into local markets is increasingly important.

For example, areas like updating tenant risk profiles and recalculating future rental cash flows are on the to-do lists of investors and construction companies. Investors will include risk mitigation strategies as a part of their deals when expanding their real estate portfolio.

Growth in flexible, hybrid workspaces

Stay-at-home mandates forced many companies to allow employees to work from home instead of the office, leading to empty office spaces.
This did not mean farewell to office spaces, as post-pandemic workers slowly trickled back into the office. The future of work looks like a combination of working from home and in-office, that is, a hybrid workspace.

A study carried out by Building Owners and Managers Association International (BOMA) found that 37% of office tenants expect to rent less office space in the future. Real estate companies and investors are looking to repurpose existing office space and improve building layouts to accommodate collaboration spaces.

The risk that investors and real estate companies face is the possibility of asset obsolescence. If real estate needs continue to change, the concern is whether certain assets may lose value.

That leads to increased flexibility in newer constructions to counter concerns of obsolete spaces. Real estate companies must ensure that spaces are adaptable, allowing for change whenever the need arises.

Increased interest in technology

There is increased investor interest in the technology used in real estate, construction, building interactions, and property management.
For instance, there’s an increased demand for buildings with intelligent air quality monitoring and touchless technology. Such buildings fetch premium rates from both tenants and investors.
Data analytics is impacting the maintenance and monitoring of buildings. Improved construction software systems are simplifying and streamlining building processes like:

● Inventory management
● Project and contract management and documentation
● Budget control
● Regulatory compliance
● Performance data tracking

For investors, keeping track of emerging possibilities spearheaded by technological advancements, and looking at which companies are making use of them, makes it easy to decide which investments to target and pursue.

ESG and sustainability

Environmental, social, and governance (ESG) and sustainability are increasing attractiveness and earning potential for buildings and real estate in the blueprints stage. Investors and tenants alike value climate adaptation, energy efficiency, and construction carbon emissions.
The pandemic further pushed the importance of ESG and sustainability that can help create market traction during uncertain times. Real estate construction is shifting towards net-zero emissions, which helps contribute to a building’s attractiveness.

For example, if a building can be self-sufficient by processing its wastewater or generating its power, it can significantly increase its earning potential. These are a few examples of how construction is turning to ESG and will continue to do so in future.

In Closing – What to Expect

The real estate market is changing, with upcoming trends like hybrid workspaces and touchless technology forming core aspects. Investors looking to boost their portfolio will do well to focus on multifamily housing and flexible alternative spacing.