Economists and real estate experts have been busier than usual since the pandemic struck and began to affect both the physical and financial health of Americans. A decade after the great recession and the housing crisis, investors are concerned about how real estate sectors will react to this new crisis.
We spoke with Adam Drucker, senior managing director and director of Urban Real Estate & Public Strategies for RCLCO real estate advisors about his prognosis for the economy and the availability of capital for real estate development.
Q: What indicators should real estate investors follow to guide their decisions?
Drucker: Right now, it's as hard to know what's happening in commercial real estate as it has ever been in my memory. We expect to continue to see improvement in the economy and that the worst is behind us. We don't expect any further deterioration in the fundamentals, so we think developers should continue to carefully pursue their business plan in anticipation of a gradually improving economy. This economic crisis is different because real estate isn't a contributing factor. It's being impacted by the shutdown rather than causing financial distress.
Over the long term, jobs reports are the indicator to watch, particularly for the multifamily market. You can't have net absorption if you have a high level of job losses. A secondary indicator, but one that's harder to track, is income levels.
The multifamily market is not one holistic market, so you'll see different outcomes depending on the market and the characteristics of the tenants. For instance, owners of Class A apartments in Washington, D.C. won't have the same experience as owners of Class B or Class C apartments in Orlando. In the past, we've seen similar movement across all markets depending on the economy, but that's less the case now. Now there are fewer similarities.
Q: Where is the demand for multifamily housing heading?
Drucker: There are several factors that impact demand. First, the type of apartment is a more significant differentiator of performance than the location because different parts of the economy have been impacted in different ways. For example, people who work in the hospitality industry have been severely impacted while white collar employees have been less impacted. Over time, those job losses have a multiplier effect, so you'll see markets that are heavily dependent on tourism have a harder time than others.
Supply and demand are also important factors in how well a market or submarket will perform. A market with a lot of new supply that also has a heavy dependence on the hospitality industry will be much harder hit than one with less supply and a wider variety of employers.
Q: What kind of restructuring do you anticipate for real estate developers and investors?
Drucker: It's really too soon to say how restructuring may happen. Right now, from the perspective of larger institutional investors, things haven't gotten bad enough to make significant changes. People are making more moves on the margins, with a strategic pivot but not a fundamental change in the nature of their business.
For example, we're seeing developers who are in multiple markets take a step back to review the 10 markets where they are now and maybe focus on four or five that they expect to outperform over the next five to 10 years. A key focus will be on white collar employment and jobs that have not been impacted by the pandemic. This will likely reinforce the ongoing trend towards development in high growth Sunbelt markets with a lot of tech sector jobs, places like Nashville and Austin.
There are some contrarians out there, too, who may look to develop more in San Francisco and New York now that there seems to be some short-term turning away from those markets. We think there are great multifamily opportunities out there in every market, but they're just different depending on the market. There's no one-size-fits-all strategy. In some places you might build and in others you might want to buy an older fixable or underperforming asset to add value to it.
Things have been good for multifamily for a decade, but I think people will take a hard look at some of the trends such as co-living and single-family rentals in various submarkets to see how they may perform in the coming years. The last recession showed us that people can make money if they alight on a point of view and execute on it.
Q: Will capital for development be available going forward?
Drucker: Yes. Even in the last eight to 10 weeks we've seen capital markets open up rapidly for multifamily. It's not as easy to get funds as it was six months ago, but it's definitely available. Investing in real estate in the second half of 2020 will be compelling, particularly in a world where there may not be better alternatives.