The most successful real estate investors know that gut instinct alone is insufficient to identify opportunities. They base decisions on data and statistical analysis. But knowing what data to evaluate, and how, has become extremely challenging as the coronavirus pandemic continues to disrupt all commercial real estate sectors. Some asset classes that investors considered safe in January, such as Manhattan office space and housing for college students, are now some of the most risky.

There are a myriad ways consumers have had their personal and work lives upended and each one represents an investment opportunity around commercial real estate. My firm, 7Park Data, collects and analyzes multiple data sources, including income and payroll data, job posts, firmographics, labor data, permitting, and construction data. We use this to predict supply and demand across all sectors in local markets nationwide and provide valuable insights to the property industry. Here are five asset classes that we have identified that we think investors should consider over the next 18 months. 

Class A Multifamily

Class A multifamily has proven to be more resilient to the pandemic’s impact Classes B and C. 

 According to the National Multifamily Housing Council, a trade association for the apartment industry, the rate of Class A renters who have paid their rent on time has remained stable over the last three months, whereas Class B/C have fallen: 

City May 1-13 June 1-13 July 1-13
Class A 84% 90% 84%
Class B 83% 90% 82%
Class C 73% 84% 69%

That resilience will be put to the test. The CARES Act’s 120-day moratorium on evictions expired last month, and negotiations in Congress over a second coronavirus relief package have stalled. President Trump on August 1 signed an executive order to halt evictions, although it is unclear whether that will be enough to will help the approximately 20 million Americans who face the loss of their homes over the next few months. 

“(We) urge the Trump administration and Congressional leaders to restart negotiations and reach a comprehensive agreement on the next COVID relief package,” said David Schwartz, Chair of the The National Multifamily Housing Council (NMHC). “It is critical lawmakers take urgent action to support and protect apartment residents and property owners through an extension of the benefits as well as targeted rental assistance. That support, not a broad-based eviction moratorium, will keep families safely and securely housed as the nation continues to recover from the pandemic.”

Despite the looming uncertainty, Class A has shown consistency throughout this crisis and we believe it will continue to do so. Additionally, institutional investors continue to pour capital into the sector across major and secondary cities, which should narrow an investor’s research into what specific markets present the most attractive opportunities. 

Secondary Cities

Secondary cities, those with populations below 500,000 people, are drawing an increasing number of white-collar workers searching for a lower cost of living, smaller tax burden, job growth, and affordable housing. 

Markets outside of the core coastal markets are significantly more affordable, with many rent-to-income ratios below 0.30, as seen in Figure 1.

City Average Income Average Monthly Rent Rent to Income Ratio
Charlotte, NC $73,202 $1,515 0.25
Austin, TX $98,124 $2,046 0.25
Jacksonville, FL $67,232 $1,572 0.28
Atlanta, GA $73,251 $1,744 0.29
Nashville, TN $70,384 $1,171 0.30
Figure 1

According to the online consumer real estate platform Redfin, the highest percentage of Atlanta’s and Nashville’s new residents are from New York City. New residents in Phoenix, Dallas, and San Diego are mostly from Los Angeles; Portland’s and Austin’s new residents are primarily from San Francisco.

“People in the coastal markets are just fed up with double-digit price increases, and they’re moving to a commuter town or to the middle of the country,” said Daryl Fairweather, Redfin’s chief economist in an interview with The Washington Post

The acceleration of the work-from-home trend due to coronavirus-forced business closures and social distancing practices has led to a nationwide awakening among knowledge workers that they don’t need to make the daily commute to and from an office location in a large city. 

A recent Gallup poll found that as states lift public health restrictions:

  • 62 percent of employed Americans are working from home—double since mid-March
  • 59 percent prefer to continue to work remotely as much as possible
  • Only 41 percent want to return to their workplace or office, as they did before the crisis

Whether or not they work from home, reducing their overall exposure to the coronavirus and future virus outbreaks is another driver of this trend. Secondary cities have reported much lower numbers of coronavirus infections and COVID-19 patient hospitalizations than the country’s largest cities. They are less densely populated, attract far fewer tourists, often do not serve as international travel hubs, and have fewer public transportation options than larger cities. 

It’s important to note that the pandemic remains virulent and unpredictable. As of this writing, the numbers of new cases in cities and states that recorded higher infection rates in the early days of the outbreak have declined, but the opposite is true for regions that previously had lower rates of infection. 

Single-Family Rentals

The rising delinquencies in rent payments nationwide, high unemployment, and consumers’ anxieties over job instability will likely compel would-be home buyers to continue renting. But that won’t prevent them from trying to secure the space and stability that a single-family home offers. SFR rent collection has actually been stronger than Multifamily, with about 5 percent uncollected. 

According to Jeff Cline of SVN/SFRhub Advisors, demand for single-family portfolios, defined as five or more homes, has skyrocketed in the last month, up 650 percent. That is spurring leasing companies like Invitation Homes, the country’s largest single-family landlord, to expand their portfolios of single family rentals. Invitation Homes raised $448 million in a share sale in June and reportedly plans to use a bulk of the proceeds to buy more properties.

According to John Burns Real Estate Consulting, the single-family rental space was the first to experience more robust demand after the pandemic struck as apartment residents and city dwellers sought out larger spaces. Most operators reported an uptick in demand during the last two weeks of March. 

“Single-family rentals allow financial flexibility (no need to qualify for a loan, no down payment, no 30-year mortgage) and privacy, with enhanced social distancing opportunities for residents,” added Ken Perlman and Lesley Deutch, both Managing Principals at John Burns. “Often, they are renters by choice and will pay a premium to live in a dedicated community with other renters and community amenities rather than in a privately owned rental home.”

 Since the pandemic struck in mid-March, the hardest-hit markets from an economic perspective have been those with a concentration of services workers, such as Las Vegas and Honolulu. 

ECONOMIES WITH THE LARGEST CONCENTRATION OF SERVICES WORKERS

% Percent of Jobs in Hardest Hit Services Categories

Top 10 (Most Impacted) Bottom 10 (Least Impacted)
1. Las Vegas, NV 38.50% 1. Raleigh, NC 13.51%
2. Honolulu, HI 32.75% 2. Pittsburgh, PA 13.55%
3. San Antonio, TX 30.48% 3. Milwaukee, WI 14.39%
4. San Bernardino, CA 27.70% 4. Boston, MA 14.43%
5. Virginia Beach, VA 26.24% 5. Detroit, MI 14.78%
6. Orlando, FL 25.73% 6. Charlotte, NC 14.93%
7. Sacramento, CA 25.36% 7. San Jose, CA 15.26%
8. Columbus, OH 22.69% 8. Indianapolis, IN 15.64%
9. Tampa, FL 22.53% 9. Providence, RI 15.73%
10. Denver, CO 22.15% 10. St. Louis, MO 15.88%
Figure 2

An institutional investor’s focus should be on markets whose economies are well-insulated from future shut-downs. Secondary cities like Raleigh and Pittsburgh with large percentages of white collar workers will continue to thrive. Employees can work from home, indefinitely if need be, and these cities offer more affordable “office space” than Manhattan or San Francisco. 

Last-Mile Industrial

The pandemic has dramatically impacted the retail and restaurant sectors, forcing consumers to change how they approach shopping. Why expose themselves to health risks by browsing store aisles or spend time waiting in curbside pickup lines when they can buy virtually anything online and have it delivered to their doors?

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