Updated: Feb 22
Covid-19 has fundamentally changed one’s perspective on what was the norm pre-pandemic. Prior to Covid there was a surge of people moving to cities to take advantage of all a city has to offer, including a plethora of restaurants, museums, parks, sporting events and more. As Covid-19 took hold and people were relegated to having to stay in place, an apartment with no outdoor space became less attractive. Also, since people have been enlightened that it is possible to successfully work virtually form home, a larger home with office space became more desirable. Additionally, since working virtually with the advent of Zoom, Teams, cloud computing and other technologies, people now realize that they do not necessarily have to be located where their employer is domiciled. This has led to a flight of people from cities to the suburbs and even areas that are distant from their offices where open space and larger homes are purchased to adapt to the Covid and post Covid environment. Even though the country is seeing historically low interest rates and one would think that this would be the only reason for increased lending requests, because of the lack of inventory and surge in buyer there has been a need for faster funding and more tailor-made loans that banks cannot deliver which has seen a surge in requests for alternative private lenders.
Most people do not want to purchase a fixer upper, they want a done home, so fix and flip borrowers are quickly purchasing homes that they can renovate, expand and adapt to the new desires of a post Covid buyer. Also, they want separate office space, lots of storage, upgraded facilities, and many amenities that will make sure that extended periods of staying home are accommodated by having an in-home fitness area, a swimming pool, sports court and more. With all aspects of our lives being carried out remotely, the focus has been more on your home than living in the city. So, if you can work or go to school from anywhere, why not live somewhere a little lighter on your wallet with a little bit of leg room and safety from deadly viruses. This flight to the suburbs has put pressure on existing inventories causing an increase in prices in many suburban areas. In California, for instance, Montecito prices have surged approximately 30% since March. Per Redfin, the National median home price has increased 15% since the start of Covid in 2020. On the other hand, prices in cities like Manhattan are under severe pressure as many people look to exit. Additionally, as many people have seen their income interrupted or curtailed, they are not in the market to purchase a home, and rentals have become more attractive. Therefore, we have seen many of our clients purchase a home, renovate it, and rent it out (“Fix and Hold”). Since there is so much competition in the market place, buyers are looking to alternative lenders because they need to close quickly, sometimes in as little as a few days. Conventional Banks typically take 45 to 90 days to close a loan, and since the volume has increased, in some cases even more. This creates a great advantage since affective alternative lenders can close much quicker than banks that are straddled by regulation.
Covid-19 has changed many aspects of the commercial real estate markets dramatically for the foreseeable future and probably for the long term. The office market has seen an upheaval as people were not able to access their offices during the height of the pandemic. People realized, as alluded to above, that technology allows people to work virtually pretty seamlessly. Many large corporations have decided to never send employees back to a physical office, like Twitter and Dropbox, Many others have decided that workers will have an option to be in a physical office or work virtually according to their needs or personal preference. This has changed the real estate office market with many small and large companies exiting leases and/or not looking for additional spaces. However, this is slightly counterbalanced because of Covid. As a result of social distancing, when a company now rents a new space they will probably have less people per square foot to accommodate for enough room to safely social distance, which will require companies to rent larger spaces to accommodate the same amount of people. However, in any difficult market there always seems to be some opportunity. There are many innovative real estate buyers who add significant value by repositioning their properties to meet the new realities. For instance, a real estate developer recently purchased the former headquarters of an insurance company and utilized the massive excess land to create a sophisticated “solar farm” which he had successfully done elsewhere. He rented out the building as well to a pharmaceutical company working on Covid which exponentially increased the value of the property. Another developer purchased a beautiful glass office building in St. Paul, Minnesota and is in the process of converting it to a multi-family building. They already have a waiting list that exceeds by far the number of available apartments.
Retail centers and malls were under extreme pressure prior to the Covid crisis and now that has been accelerated. Companies like Amazon and Instacart have replaced the need in many cases to shop in person at a retailer. This trend will continue as people have adapted very well to utilizing technology to have their purchasing needs met. As previously indicated, there is always opportunity in a difficult market and some of innovative retail owners and buyers are doing unique things like decreasing the amount of retail in a center and creating multi-family or single-family buildings on the reclaimed land to create a mixed-use product. Additionally, some are taking “dark” big box stores and creating distribution centers for tenants like Amazon. Others are repurposing a dark big box and creating self-storage space, or taking a big box shell and creating a cloud computing hub.
The hotel/travel industry has been devastated throughout the pandemic. Many hotels are in an economic struggle as a result. However, this disruption brings opportunities for some who purchase hotels and convert them to multi-family properties. An experienced developer in Albuquerque, New Mexico purchased a hotel that was in bad shape and now they are converting it to 260 apartments with 83 already completed and rented in a record setting two months. There is a waiting list for the rest. These are excellent opportunities to fund experienced developers who are attuned to redeveloping a property to its highest and best use.
Covid has changed the real estate market, but there is a lot of opportunity in every sector as entrepreneurial developers figure out the new landscape and get innovative in creating properties that are modernized for the new paradigm.
This article was originally published as part of Lido Consulting's Fall 2020 newsletter.