No one can predict the future, but when you’ve been investing in real estate as long as I have, it is
possible to see the trends and look for opportunities based on those trends. Here are five things to
consider as you begin to make plans and set goals for 2021.
1. Foreclosure Properties are Likely to Increase
Although each state has its own COVID-19 eviction and foreclosure rules, the order suspending the
foreclosure on homes with federally backed mortgages, as well as evictions from rental properties,
ended on August 31, 2020. However, homeowners having trouble making their payments can still defer
or reduce their payments for six months as long as they make these arrangements.
Because of the economic consequences of COVID-19, many homeowners are taking advantage of these
programs. As of the first week of September 1 :
- 3.7 million borrowers are in a mortgage forbearance program
- About 75% of those in such a plan hope to renew the plan by another three months
- Mortgages more than 90 days past due doubled between May and June
What this means for real estate investors depends on what banks and government entities will do. Since
no one wants to see a repeat of the mortgage crisis, we will likely see programs meant to help those
who are unable to pay their mortgage. Banks are likely to work with homeowners to modify mortgages,
and they are also likely to work to spread out any ensuing foreclosures over time. Similarly, the
government will likely offer some kind of foreclosure assistance to homeowners.
Nonetheless, investors are likely to see a spike in available foreclosure homes. First, since March, the
typical amount of foreclosures were stopped, meaning these will hit the market once forbearance
programs end. Second, despite bank and government intervention, the effects of COVID-19 will cause
some people to lose their homes.
We should begin to see this spike in the second quarter of the year as forbearance programs and their
extensions end.
2. Low Residential Inventory – At Least Through Q1
Currently, there is a shortage of residential inventory, with Realtor.com showing that national inventory
is down 39%. When coupled with historically low mortgage rates, the price of single-family homes is
$350,000, up 11.1% from this time last year 2 .
Traditionally, the fall market begins to slow down. However, this year, homes are selling faster in
September than they did in August.
This trend will continue at least through the first quarter, but there may be some equalization when the
foreclosures hit the market.
3. Commercial Property Owners More Willing to Negotiate
Some commercial property during COVID-19 has taken a hit. US Capital Trends shows that both retail
and hotel assets are in distress, making up 92% of newly troubled assets in the second quarter of 2020.
Additionally, retail prices for August dropped 4.1% over last year.
Because of numbers like these, some commercial property owners – those who were considering
leaving the space before COVID and those who were not well-insulated against troubled times – have
begun selling off their properties.
Because the market for such properties is down, commercial sellers are more pliable and willing to offer
better terms, conditions, and seller financing. The thing to keep in mind, however, is that lenders are
unlikely to provide loans for retail and hotel space at this time.
4. Consider Converting Office Space
Employers are now developing strategies for more remote work, thus changing their need for office
space. This change differs based on the needs of each employer. For instance,
- Need less office space because most workers will be entirely remote
- Need more office space because workers in the office need more space for social distancing
- Need different office space to accommodate workers with varying in-person schedules, such as
workspace on-demand, flexible workspace, executive suites, and swing space
- Retrofit office space to meet COVID restrictions
Until a vaccine is readily available to the general public, which may be months away, the need for office
space is going to continue to change. Therefore, those who currently have office space in their portfolios
or those adding office space need to keep these considerations in mind and make necessary changes.
Another option is to convert office buildings to other commercial functions. For instance, some investors
have found success in converting office space to multi-family space. Other commercial options to
consider include:
- Warehouse, cold storage, and fulfillment space – due to an increase in e-commerce
- Lab space – life sciences have increased needs
- Ghost kitchens – food prep for food delivery services rather than restaurant space
- Studio space – surge in streaming content
5. Vacation Homes Will Continue Getting Hotter
Higher concentration, urban areas are losing population due to fear of the spread of COVID, the ability
to work from home, and general urban unrest. For instance, there has been a mass exodus from most
large cities in California as well as New York City.
Most of those leaving these urban centers head for areas with a smaller population, and a significant
number are renting homes rather than purchasing them. This has led to a boom in vacation rental
properties willing to rent by the month rather than by the day or week.
Additionally, vacationers now prefer vacation rental homes to hotels. Not only do they feel the vacation
homes are cleaner, but they feel safer due to less contact with others. Therefore, in many locations,
finding a vacation rental is nearly impossible.
In 2021, finding a vacation rental could be a very good investment as long as the deal is right.
As we head into next year, keep in mind that the real estate landscape is ever-changing and that events,
such as COVID-19, often have an impact. However, with careful observation and an understanding of
real estate trends, real estate investing can remain not only possible but profitable.
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