June 13, 2020
Retail is not the only real estate sector with its transformation shifted into overdrive by the COVID-19 crisis.
Very few real estate asset classes are expected to escape substantial changes by the pandemic, at least in the short to medium term.
In apartments, real estate managers are focused on repositioning units to create space for people to work from home.
Residents and potential tenants are much more focused on Wi-Fi capabilities and the unit’s interior than on the size of the pool and party space, which can’t be used because of COVID-19 restrictions, said Pamela Boneham, Chicago-based managing director and head of capital strategies at Barings. “There’s been a real shift in the focus of residents. We believe work from home is here to stay, not in its current form, but as an option.”
Indeed, in June, Barings surveyed its 200 employees about the work-from-home option; about half of the employees responded. Some 60% indicated that they would be incorporating a home office within their living space in the next six months and 80% indicated they would do so in the next two years.
That doesn’t mean that the office sector is dead, but that the office sector has the widest dispersion of potential outcomes, she said.
Barings executives believe the offices that are the most likely to thrive are those that offer a healthy environment with outdoor air and natural light. It’s an existing trend that has accelerated due to the pandemic, Ms. Boneham said. There is also more interest than before the pandemic in smaller, suburban offices that give tenants the option to take the stairs rather than an elevator, she said.
Sean Burton, Los Angeles-based CEO of multifamily real estate manager CityView, said the biggest change brought on by the pandemic is the size of most desirable apartments.
“Prior to COVID, the most popular floor plan was a studio,” with tenants spending more time in the common areas, Mr. Burton said.
These days the real push by prospective tenants is for one- and two-bedroom apartments because people are spending so much more time at home, Mr. Burton said.
“It will be interesting to see if the trend going forward goes back to smaller units,” he said.
When the pandemic hit, CityView made tenant retention a big focus, working with tenants who lost their jobs or faced other pressures and not increasing rent, Mr. Burton said. The result is that retention is up 20%.
One bright spot is that virtual leasing, which the firm ramped up earlier this year, has been “incredibly robust,” he said. Through virtual leasing, prospective tenants can tour the property and specific units online.
With virtual leasing, CityView’s leasing is close to pre-COVID-19 levels, Mr. Burton said.
Overall multifamily will continue to be a strong asset class within real estate. However, for the time being, mid-rise, lower density buildings where people can take stairs and access a rooftop deck will be preferred over high-rise buildings, he said.
“I’m not sure how many people will want to be in a high-rise and go up an elevator,” Mr. Burton said.
Some managers expect a reversal of the pre-pandemic trend of a migration toward urban living.
“Cities are struggling” as millennials leave for the suburbs to start a family, said Jonathan Litt, Stamford, Conn.-based founder and CIO of real estate hedge fund Land & Buildings.
Many cities, especially in New York, are facing an oversupply of office space, he said.
“New York office (space) is going to see a meaningful reduction in demand. Not because people will be working from home forever but the change in philosophy of management teams allowing people to work from home three or four days a week,” Mr. Litt said.
Across sectors, Mr. Litt said investors should get used to lower returns from real estate.
Some managers expect capitalization rates, which is the expected return on a property, to fall across property types.
“When the dust settles we will see cap rates (in the U.S.) like Europe or Japan where cap rates are much lower,” Mr. Litt said. Winning property types will include digital centers, cell towers and homes for rent.
“We think values on those will go up,” he said. “We think values on offices, malls, strip centers, movies, casinos, hotels — those are melting ice cubes.”
