Five Real Estate Trends to Watch in 2021
By Karen Norris
April 10, 2021
Los Angeles, California
It is virtually impossible to overstate the impact that the COVID-19 pandemic has had on both the global economy and, specifically, the real estate industry. From the closure of physical properties nationwide to the seismic digital transformation that is still underway, accordingly commercial real estate investors and managers are rapidly adopting and implementing new technologies. 2020 was a year of profound change for the real estate sector, and we will likely feel its effects for years to come.
It can be tempting to fear the news, with headlines sounding off on the more than $2 trillion in CRE debt that is due to mature over the next four years. According to Bloomberg, roughly $430 billion in combined commercial and multifamily real estate debt will come due within the next year, which will, no doubt force a reckoning over what any building is actually worth in a post-COVID world.
As the founder and president of one of the leading real estate concierge firms specializing in commercial office/retail and luxury residential management in Los Angeles, California, www.NextLevelLuxuryGroup.com, from my perspective, the pandemic has accelerated trends that have been simmering for years, and it may take two to three more years before the hardest-hit asset classes settle into a new normal.
Still, I believe that the outlook is bright. There are many indicators that, while a few established rules may have changed, the CRE business still has a place for savvy players in a new normal. In my opinion, this market presents a unique opportunity for savvy investors.
While some real estate asset classes have suffered over the last year, other deals have cropped up in their place as prime opportunities to rethink physical spaces and creatively adapt their uses to the needs of today’s real estate market. The key is understanding the emerging trends as the 2020 pandemic gives way to the 2021 reawakening.
According to a recent article in The Wall Street Journal, First Quarter Results many companies that own shopping centers, hotels, and New York office buildings were decimated most of last year but mounted a first-quarter comeback, as investors bet that a vaccine rollout can revitalize these hard-hit businesses. Real-estate investment trusts (REITs) rose 9% during the three months, beating the S&P 500’s 6% gain, according to data analytics firm Green Street. Fueling the REIT rally was an 18% rise in the shares of lodging owners and a 32% gain by mall owners.
The real-estate recovery was part of a broader market surge that lifted many beaten-down sectors starting late last year when investors gained confidence that the pandemic would start coming to an end this year. “Investors started saying, ‘give me as much of a reopening theme as you possibly can,” said Michael Knott, Green Street’s head of U.S. research.
Here are five real estate trends to watch in 2021:
Trend #1: Uncertainty Around Retail Space Will Continue
E-commerce has proven a formidable challenger to traditional brick-and-mortar retail spaces and small businesses over the years, but the specific circumstances of the pandemic sealed it. From declining foot traffic as consumers increasingly take to online shopping with same-day delivery, to shifting consumer appetites for entire categories of discretionary retail amid the rise in stay-at-home behaviors with the apparel industry being hit the hardest, there are many headwinds for retail assets.
Even reluctant online shoppers have been forced to alter their buying habits over the last year, with ever-more online retailers emerging by the day. This meteoric rise of e-commerce brands, including the already behemoth Amazon, means this shift in consumer behavior just might be here to stay. Amid this, many big-box retailers will need to immediately rethink their merchanting approach or they could soon fall by the wayside.
However, these difficulties also present an entirely new set of opportunities for creative investors and property owners. I predict that well-placed and thoughtfully developed, “adaptive reuse” projects will continue to gain traction in the near term.
The smartest of these brands have already begun a transformational pivot toward same-day shipping, courier delivery, and a variety of pick-up options that leverage existing storefronts as last-mile distribution centers. For example, Apple Stores in many major cities have reimagined their storefronts as socially distant hand-off points, directing consumers to browse and order online for same-day pick-ups in their former showrooms. As a result, while physical retail spaces may continue to decline in 2021, some brands will adapt and thrive in this new environment through the redevelopment of their own storefronts.
Trend #2: Industrial Space on the Rise
Undoubtedly, our collective reliance on delivery systems and logistics throughout the pandemic has showcased warehouses to be the apparent winner of commercial real estate. After all, something had to fill the void for consumers’ once-regular trips to big-box stores for everyday needs and industrial spaces have been at the core of fulfillment for the surge in online orders. Reliance on such property types is expected to increase in 2021.
Even retailers with ample industrial space today may seek more of it in the coming year, as consumer’s appetites for same-day delivery will necessitate keeping increasingly more stock on hand. In fact, experts surveyed that we should anticipate 250 million square feet of additional demand for warehouse space this year, compared to only 211 million square feet annually since 2016.
As a result of the current surge on industrial real estate, CRE investors may be hard-pressed to find just the right opportunity with this property type, but some such options do exist and are worth a closer look. And, for those real estate investors who already have a vested interest in warehouses or logistical spaces, the current confluence of high rent prices and low vacancy rates are likely to be lucrative, now and in the coming years.
The retail category is facing a seismic change as consumer shopping behaviors shift away from physical shopping centers and toward e-commerce. Meanwhile, demand for industrial space is on the rise due to a sharp uptick in retailer need for logistics that support overnight or same-day delivery. Together, these two trends make clear that while many brick-and-mortar retail spaces may be in decline post-pandemic transition, there are also myriad opportunities to repurpose some retail locations for industrial use.
Trend #3: Travel and Hospitality Will Rebound Slowly
Travel and hospitality will rebound slowly, with hotels, in particular, facing a difficult year ahead. Brands within this CRE sector are expected to recover around 50% of revenue on average in 2021 and the industry as a whole is not likely to fully recover until 2023. In dense urban markets like New York and San Francisco, experts predict a rebound of 40-50% this year, pending the coronavirus vaccine rollout; meanwhile, smaller “drive-to” destinations and emerging markets like Jacksonville and Raleigh, could see a more rapid recovery rate approaching 75%.
Overall, I predict that hospitality will fully rebound in the post-COVID year, thanks to suppressed demand for both traveling and dining out over the last year—but it is likely to be slow. Lenders could avoid such commercial real estate investments, for now, viewing this asset class as a portfolio risk. However, keep in mind that as hospitality brands default this year, this vacuum can also create promising opportunities for the right real estate investors.
Trend #4: Exodus of Urban Areas Continues—with Signs of Return
Location has always been the central tenet of the real estate industry, and the pandemic has dramatically altered where people want to live, work, and spend their time. With remote work on the rise, many workers have fled high-cost metros like New York and San Francisco, leading to rising vacancies and reduced rents, while relatively more affordable areas like Indianapolis and Dallas have fared much better. Indeed, over the last year, many have fled major metro markets in favor of 18-Hour Cities, such as Austin, Raleigh, Atlanta, and Seattle, creating a wealth of mixed-use CRE opportunities for housing, co-working, and general office space, as well as for a variety of small businesses that bolster these growing economies.
The majority of office spaces stood vacant last year, and many companies have adapted their work-from-home policies in ways that could prove permanent. Analysts predict that office occupancy could be permanently cut by 15% due to this shift to remote work. And housing has followed much the same trend, as families flee the confines of larger cities to spread out in smaller towns that offer space and affordability.
Still, amid the mass migrations taking place, there are signs that we should not count out the big cities just yet.
As one bankpoints out in its 2021 commercial real estate trends analysis, while we may have expected a long-term exodus from major cities to the suburbs, many employees do benefit from working onsite in office spaces directly with their teams. “This is especially true for young employees beginning their careers, many of whom moved in with their suburban families to save money,” notes the bank’s assessment. And they are also looking for workplaces that support employee socialization.) Because major companies are often located in urban areas, employees—especially younger workers—may return to the city quickly as offices reopen.
While offices may never rebound to their pre-COVID levels, I predict a nationwide rise in co-working spaces like WeWork, and micro-units—small, efficient suites of up to 400 square feet that offer all the comforts of a traditional office with neither the frills nor overhead…and none of the long-term lease commitment.
Trend #5: Affordable Housing – Urgency Brings Opportunity
The COVID-19 pandemic and the subsequent economic downturn have created a unique opportunity to reimagine what affordable housing can be. While rent control measures have varied across the nation, the general housing market remains in a pinch and evictions are on the rise. According to a recent report, mounting research suggests that commercial-to-residential conversions of strip malls could be one key solution.
One expert thinks that abandoned commercial strips are “a perfect storm of opportunity,” should they be upzoned to accommodate affordable housing tenants.
I believe there is truly a historic opportunity to reimagine uses for such abandoned retail centers, with potential uses that include conversions to shipping and distribution facilities, co-working and office space, and affordable housing.
The fact is that malls, hotels, and even underutilized factories can be desirable commercial properties for multi-family, micro-housing, and co-working spaces. Such conversions tend to be less expensive than ground-up construction. And with multi-family poised for continued growth in the years ahead as increasingly more people seek affordability, this reimagining of physical commercial real estate should present a singular opportunity for imaginative investors.
Given the described trends, here are key points to consider if you currently own a commercial real estate asset and are trying to determine how to navigate the current marketplace:
- What are the macroeconomic trends? Do they support the continued use of the property as is, or do they necessitate a shift in the business plan?
- Cost. If the trends support a shift in strategy, it is important to consider the cost associated with making it. If the cost is significant, how will it be recovered? Are higher lease rates supported? Can it be recovered through increased sales?
- The local market. Aside from broader economic trends, what is happening in the local market? What are the supported uses? Is there a chance to do something unique in the market?
- Reuse. Can the property be adapted to capitalize on current market trends? For example, grocery store stock room reuse could be adapted to serve as a fulfillment center for online and delivery orders.
- Restart. Is the property functionally or financially obsolete? If so, the business plan may need to be re-thought and a total overhaul may be needed.
Karen Norris
Founder of Next Level Luxury Group, Los Angeles, California
California Real Estate License # 01347249
