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The real estate market of the US is undergoing a drastic paradigm shift owing to the events of 2020. The devastating effects of COVID-19 and a shift in the reins of the Government with the Presidential election negatively affected the real estate with uncertainty. However, as the world strives to return to normalcy even amidst the pandemic, 2021 could be significant for the real estate industry. With a new administration, equity markets reaching new highs and COVID-19 vaccines, the asset classes are resuming their operations and framing the real estate investment trends in 2021.

Despite the disruption, various asset classes are expecting a number of opportunities that are going to have a fundamental effect on the investment portfolios and on the role of real estate on the economy. Let’s have a look at how different asset classes will shape the real estate investment trends in 2021.

Source: Deloitte

How are various asset classes affecting the real estate investment trends in 2021?

1. Industrial Property

Industrial property values  have been the most resilient real estate asset class in 2020 amid the COVID-19 crisis. This is largely due to the spike in online shopping. CBRE research has found that year-over-year e-commerce growth surged to 44.5% in Q2 from 14.8% in Q1. Green Street Advisors  anticipates that 30% of all retail sales will occur online by 2030. As a result, retailers, wholesalers and third-party logistics companies (3PLs) will aim to reach consumers faster, with low transportation costs. Therefore, the demand for industrial real estate will rise in the coming years. JLL projects that the U.S. will require an additional one billion square feet of industrial real estate by 2025.

Trends for 2021

This rise in e-commerce sales causes a surge in the long-term demand for logistics real estate. There is a strong demand for warehouse spaces, data centres, last-mile distribution, cold storage etc in urban centres. However, land constraints and high costs continue to be a barrier to new development. Therefore, the reuse of retail buildings for industrial occupiers is expected to grow in 2021. Class B properties are also experiencing rent growth, low vacancies and renewal rates. 

Last mile distribution spaces will see a steady growth in the  best position in the metro areas.  It is also expected that demand for larger distribution centers of 600k+ sq.feet in the outskirts of metros will increase with the e-commerce growth. Class B industrial spaces will fill in the requirement  of distribution centers near poulation bases. Finally, Forbes reported that, amongst REITs, data centers were the only industry segment to “show a positive gain for the first quarter of 2020, growing by 8.8%.”

CBRE Economic Advisors forecast that new industrial completions will increase by 29% next year. Industrial real estate will continue to be the attractive asset class it is to investors. The rise of industrial rental properties will bring in more investors. CBRE reports that overall industrial rents grew by 6.3% year-over-year in Q2 in 2020 and it is expected to continue at the same rate in 2021 as well. The same report also estimates that nearly 80% of U.S industrial markets will see positive rent growth over the next 12 months. Therefore, Industrial properties will be on the rise in the real estate investment trends in 2021.

2. Multifamily

2020 was an overall tough year for multifamily owners as they lost rental income plus income from waived fees. Deferred rents and delinquencies also led to market deterioration. However, this sector expects to grow significantly and positively impact the real estate investment trends in 2021.

Trends for 2021

CBRE forecasts a return to pre-COVID vacancy levels and a 6% increase in net effective rents next year, with chances of a full market recovery in early 2022. Vacancy rates for low-cost multifamily housing will remain relatively low in 2021. While Class A assets saw a decline in their occupancy rates in 2020, class B assets should continue their low vacancy rates and steady rent growth in 2021. 

With the improvement in the market conditions, multifamily investment volume shouldincrease in 2021. CBRE Research predicts U.S. multifamily investment volume will reach about $148B next year. Although it’s lower than the 2019’s record level of $191 billion, it is definitely 33% higher than the 2020 estimate of $111 billion.

With greater clarity on future revenue streams, investor demand for multifamily assets should increase this year. CBRE forecasts that favourable mortgage rates will cause an investment boost. Fannie Mae and Freddie Mac should have extensive capital opportunity to support the investments. 

Geography played an important part for multifamily in 2020, with rents falling as much as 20% in downtown San Fransicso while they grew over 4% in Phhoenix. Location within metros also mattered and there was a higher preferance for the sub-urban spaces or “hipsturbia”. Data showed a sharp decline in the the value of urban apartments in urban metros. This is due to a number of reasons- work-from-home, the closing of a portion of urban amenities, the unwillingness to use public transit, a desire for more living space and greater access to greenery. As a result, it is evident that suburban submarkets will grow significantly in 2021.

For multi-property operators, value-added strategies for improving properties in strong submarkets within growing metros can prove beneficial to secure more rents. Suburban assets in the Midwest and Southeast regions will be the most profitable with the best market performance and expected revenues in 2021. Apartments with a great location in cities like New York and San Francisco will be an attractive investment opportunity and wil bounce back by 2024.

“Build to Rent” multifamily sectors seem a viable option in 2021 for millennials demanding more space and amenities. Moreover, the reuse of distressed hotels as multifamily properties also holds the potential to solve the US’s affordable housing crisis. 

3. Hospitality

The hospitality industry is perhaps most affected by the pandemic than any other property types in 2020. The travel restrictions and prolonged lockdowns severely slowed the growth of the hospitality sector. As a result, reports suggest, that occupancy levels dropped from weekly averages above 60% to as low as 21% in mid-April. Revenue per available room (RevPAR) reduced by over 80% year over year. National Occupancy levels rose to roughly 50% by August with RevPAR reached $50. However, since then occupancy levels have dropped to 41% with RevPAR reducing to $36. Low guest rates or government mandates led to the temporary closure of some properties. Full-service hotels in the urban centres of major metropolitan cities were more affected than smaller properties in smaller cities.

Trends for 2021

However, the rollout of multiple COVID-19 vaccines marks the beginning of a positive, long-term recovery of the hospitality sector. STR, the US’s leader in hospitality research, projects a 30% increase in RevPAR for 2021. With the vaccines in place, investors are projected to take a more aggressive stance on the assets. JLL reports suggest private equity groups and high-net-worth individuals will continue to be active investors of hotel assets in 2021. According to the report, $24.5 billion in the capital was raised globally in closed-end funds in 2020 for hotel and hospitality assets. Moreover, non-traditional investors are seeking to invest in distressed assets. Therefore, investors are expected to realize outsized returns by 2025. 

The strongest hotel owners and operators are likely to redesign their hotel rooms and introduce touchless technology in their services to match consumer preferences for social distancing post COVID. However, many of the weaker players are may see a decrease in their demand owing to their inability to refurbish. As a result, an increase is expected in the transaction volume in the latter half of 2021. Hence, the hospitality sector will be a major player in the real estate investment trends in 2021.

4. Office

Most office spaces were vacated in 2020 for the pandemic. With the pandemic still remaining a theat at large, companies have adopted work-from-home policies. As a result, CBRE reports that office demand could permanently cut by 15% due to this shift to remote work.

Trends for 2021

According to CBRE, 85.7% of companies plan to return to office halfway through 2021. Therefore, there will be a rising need among companies for more space per employee. Companies have been cramming more and more people in a small space for a long time. This led to 125m2 per employee become a typical density.

However, COVID protocols of physical distancing and expansion of employee space will make the companies seek cheaper office space options. Therefore, there are chances of a trend to shift to suburban office spaces. These are a lot cheaper than their urban counterparts and are mostly low-rise. This implies that more employees do not need to squeeze into the elevators and can use the stairs while maintaining distancing. Free, abundant parking is another perk that these suburban offices provide. Hence, there is a prediction that even the most expensive urban office space in the largest metros would shift to these suburban office markets. However, these shifts may occur in the long term.

Therefore, it is uncertain how the real estate investment trends in 2021 will impact this asset class in the first half of the year.

5. Retail

After the massive shift to e-commerce in 2020, the retail market almost became dormant. Bankruptcies and store closures became a norm for failing retailers. However, there are chances of recovery of the retail sector in the real estate investment trends in 2021, albeit slow and uneven.

Trends for 2021

A handful of the best-located centres should be able to see a spike in their demand after many tenants vacated them in 2020 due to COVID. New retail concepts may occupy the vacancies left by the failed retailers. Digitally native brands, automotive showrooms and service centres, medical uses, franchisee driven operations, health and wellness and others will capitalize on the opportunities of the market conditions. There are also forecasts of growth for grocers, convenience stores and quick-service restaurants. Second-generation space with low rental rates in prime locations will drive lease transactions in 2021.  Moreover, private equity and venture capital funds will actively finance new retail ventures, for greater returns.

However, older and weaker assets, may struggle to recover this year. CBRE research predicts a 20% reduction in total US retail real estate inventory by 2025 from the current level of 56 sq. ft per capita, according to ICSC. This will mainly be due to the large-scale adaptive reuse and conversion of the weaker class B and C assets. The most common type of conversion is retail to industrial. However, conversion to multifamily, self storage or even last-mile distribution uses will be viable on market and asset-specific basis.

Grocery-anchored shopping centres will emerge as the most profitable investment opportunities within the retail sector this year. A combination of such quality core assets, grocery-anchored deals, strong grocery sales, high traffic counts, and a mix of inline tenants, will attract institutional investors in 2021. Private equity firms will pursue distressed retail assets for stabilization and attractive risk-adjusted returns.

In addition to this, one-off opportunities for shopping centres in prime locations within submarkets, will also likely attract investment opportunities. However, this largely depends on whether the suburban migration patterns during the pandemic will be long-lasting.

6. Student Housing

Prior to the pandemic, investment in student housing properties was steadily increasing each year. With the outbreak of the virus and universities sending students back home, reduced investments greatly. However, enrollment which fell about 3.0% in fall 2020, should rebound in 2021.

Trends for 2021

The new academic year is expected to increase occupancy and leasing, thereby attracting investors.  Enrollment in fall 2021 should increase with more international students and high school graduates. As a result, this should return the housing demands back to pre-COVID performance levels by fall 2021.

In addition, larger universities in major conferences can gain a better edge over smaller and weaker institutions. While Tier I, a major conference and the reputed universities will continue to attract a large number of students from the country and abroad, their student housing markets will rise. Hence, projects near or adjacent to campus will see an inevitable spike in their demand. In contrast to this, smaller and second-tier colleges will struggle to maintain enrollments and finances. Therefore, they will only have a small portion of the country’s total student housing inventory. Hence, it is evident that high profile universities will attract wider investment opportunities than their smaller counterparts.

Further, student housing benefits from the cheap long-term financing by Fannie Mac and Freddie Mac. With extremely low agency rates for the near future, the current difference between borrowing rates and cap rates should provide upwards pricing pressure for the next few years. Hence, cap rates are likely to decrease further in 2021.

7. Self Storage

Self-storage has remained profitable for a long time and continued to stay afloat even during the pandemic. 

Self-storage is benefiting when renters are migrating to suburbs due to the COVID scare and need a place to store their belongings. Further, offices that are shifting to remote workstyles or downsizing also need self-storage facilities to store their extra business items. There is also a supply growth in this asset class. 

Trends for 2021

According to Green Street Advisors, the expected rate of annual new supply from 2020 to 2024 is a little over 3%. This is much lower than the 5.25% average annual rate of new supply growth from 1995 to 2009. However, with a continued rise in demand and, relatively low supply, self-storage appears to be a resilient asset class over the next four years. The net-operating-income (NOI) growth of self-storage between now and 2024 ranks third,  only behind manufactured housing and industrial. According to Mordor Intelligence Research, the self-storage market valued at $87.65 billion USD in 2019. However, it is expected that by 2025, the valuation will climb to $115.62 billion with a CAGR of 134.79% over the forecast period of 2020-2025.  Recently, StorageMart — the eighth largest self-storage company — announced Bill Gates joined them as an investor. 

Self-storage is essentially resilient and recession-resistant. Therefore they pique the interests of public REITs like Cube Smart and Extra Space. Self-storage for public REITs has been a way of stabilizing their portfolios with fewer capital investments. Moreover, in terms of location for new development or redevelopment purposes, growing metros are most favourable with less supply like five sq. ft or less os self-storage space per capita within the primary market area. Hence, self-storage continues to point upwards in the real estate investment trends in 2021.

8. Senior Housing

Studies estimate, in 2021,  23 million people over the age of 75 and 8.9 million over 83 are living in America. 83 is also considered a common age for people to move into senior housing. It is estimated that by 2050, over a fifth of the population in the United States will be 65 years or older, compared to only 15.6 per cent today. However, in 2020, with prolonged lockdowns and virus scares, move-out rates at senior housing facilities have risen, with lower than normal levels of move-ins.

Trends for 2021

But despite the challenging circumstances, some properties succeeded to lease to new residents during the pandemic.  A reduction in resident turnover and continuing stabilization of some of the senior houses relieved the asset class to a great extent. Moreover, the upcoming decade will witness a transition from the Silent Generation to the Baby Boomer generation. As the baby boomers reach 83 by the end of this decade, the senior housing sector will see a massive influx of demand. According to CBRE,  according to CBRE, it will require 40,325 new units per year to meet peak demand (2020 – 2025). According to Senior Housing Analytics figures cited by PGIM, the  demand for new senior housing in the US will increase by about 850,000 units between 2010 and 2030.

However, this asset class is not expected to immediately recover in 2021. Several factors such as attractive discounts and resident eligibility will shape the growth of this sector this year.

9. Medical office

Investors favour Medical office building (MOB) for their long-term leases, stable occupancy and income, and tenant credit quality. The investment amount in this asset class is expected to go up in 2021 as well. 

Trends for 2021

Over the next 10 years, the number of people aged 65 and older will grow more than 30%. It is estimated that they visit the physician’s office nearly six times per year on average, more than younger people. Therefore, an influx in patients creates a high demand for medical office space. Sale-leasebacks seem to be a viable option for real estate healthcare owner in 2021. In this system, the owner sells their property and leases it back from the new owner. The sale of the real estate asset allows them faster access to capital for other uses. Hence, sale-leasebacks will remain profitable in a low-interest-rate environment of 2021.

Demand for medical offices will result in the demand for medical office construction in 2021.  Last year, more than 2.8 million square feet were delivered in the second quarter. On a national basis, vacancy rates climbed 20 basis points to 8.9% in 2020, which stands in sharp contrast with the 13.6% vacancy rate for traditional office space. Moreover, rent growth in medical office rose by 9% over the last year to a second-quarter average of $25.22 per square foot.

However, small-to-mid-sized medical offices and critical care uses are continuing to gain traction in the medical sector even post COVID. Small to mid-sized offices near hospital campuses, allow patients easier access to medical aids and require relatively lower operating costs. Moreover, critical care uses operated at maximum capacity proved extremely useful during the pandemic.  Thus, both of these segments of the medical office will generate greater income and long-term leases. Therefore, medical office properties will fare well in the real estate investment trends in 2021.

How will Location affect the real estate investment trends in 2021?

Work-from-home and consumer buying habits will largely shape the investment trends in well-located properties across the country.

  • There is a spike in pandemic-induced migration in certain markets like South Florida and the Mountain Region. As a result, there is an inevitable increase in multiple investment strategies in Florida markets, especially multifamily.
  • Due to the rise of the secondary markets and pandemic-induced decision making, companies are shifting their office spaces to suburbs. Various companies are relocating their headquarters from California to Texas. For instance,  Oracle to Austin, CBRE to Dallas, and Hewlett Packard to Houston. 
  • In markets such as Raleigh-Durham, Nashville, and Phoenix, multifamily properties and apartment rents are seeing a huge spike. This is because residents are wanting to live in these places post-pandemic and work-from-home.  We are seeing residents cast their votes on where they want to live post-pandemic. Raleigh-Durham, NC, Denver, CO, Charlotte, NC, Austin, TX, and Phoenix, AZ are the major locations of preferences among residents and investors.
  • Cities such as Boise, ID, Bozeman, MT, and Salt Lake City, UT are also seeing a boost in their demand. This is because of the remote work trends and the Mountain region offering affordability and attractive quality of life.

Conclusion

It is evident that although the US real estate economy is still struggling from the after-effects of 2020, it is definitely expecting a bright future of recovery in 2021 and the coming future. The revival of the major asset classes will radicalise the real estate investment trends in 2021.

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Prabali Chattoraj
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