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The Evolving World of Commercial Real Estate and Movements to Keep an Eye on in a Post-Covid World

By: Andy Evans

As vaccines roll out across America, and day-to-day life begins to resume as usual, it is crucial to understand how Covid-19 has affected the commercial real estate industry. As we know, the pandemic shifted people’s perceptions on the necessity to work in an office every day or go to a physical store to purchase the goods they need. We saw a significant rise in work-from-home structures as well as a staggering 44% growth in e-commerce volume compared to the previous year (Forbes).

With that being said, the commercial real estate industry remained remarkably stable. The number of foreclosures barely increased, while prices fell far less than after the 2008 financial crisis and are already rebounding much quicker than anticipated. Stability can partially be attributed to supportive federal monetary policy and low interest rates that allowed struggling assets to hold out. As we near the end of the pandemic, US private real estate companies are sitting on record levels of dry powder nearing 400 billion (PGIM) and are looking to capitalize on the increased momentum in the economy. While asset classes such as industrial and multifamily will continue to show their strength in the market, we have identified several emerging sectors where investors can expect to see significant growth and potential.  Out of crisis comes opportunity and the trends that we have outlined below are creative ways to tap into newly emerging markets, asset classes, and strategies. 

  1. Logistics/Cold Storage

A surge in online shopping and grocery sales has led to a steep increase in demand for cold storage space. Developers across the country are eager to get into the space due to the consistency of cash flows and the overall stability of the business. In 2020, online grocery shopping grew 81% in comparison to 2019 (Coresight Research) and factors such as subscription meal services and specialized pharmaceutical products are driving this emerging asset class. Growth is projected at 11.71% from 2019 to 2026 (Foodinstitute).

  1. Multifamily Conversions 

Converting other types of buildings into multifamily apartment complexes for rent has grown increasingly popular as construction costs have skyrocketed in the last year. Malls, factories, office buildings, and hotels are considered ideal candidates for traditional, micro, affordable, and senior living concepts due to the fact that they are generally located in already desirable areas. These conversions often have unique characteristics considering their history and are attractive because they are generally less expensive on a cost-per-door basis than newly constructed units. 

  1. Retails Creative Repositioning Opportunities 

With malls and retail centers struggling to garner shoppers and foot traffic falling 22% in the country’s top 10 malls (FNRP), many redevelopment opportunities are presenting themselves across the country. 78% of consumers expect online shopping to become more popular post-COVID 19 (Deloitte) and as a result, landlords must find new and innovative ways to stay relevant.  Popular redevelopment projects include apartment complexes, school campuses, medical facilities, and even churches. Another study conducted by Deloitte explores how malls could stay relevant by repositioning the assets based on the goal of creating a place where people can socialize, eat, live, and work all in one location. These physical spaces are not going anywhere anytime soon, so finding innovative ways to capitalize on the significantly discounted assets presents ample opportunity for massive upside.

  1. Last-mile Distribution

Industrial assets located within the urban core or strategically placed in high-density areas to reach the maximum population (known as “last-mile distribution”) are seeing record growth with the increase in e-commerce. The increase in e-commerce that we are witnessing places massive pressure on logistics operations, and these assets are proving to be the solution. America’s appetite for one and two-day deliveries depends on access to local inventory. With the high demand for these spaces, we can expect to see buildings repurposed for this use or new built-to-suit development projects. Regardless, these assets will provide stable returns for investors and provide diversity to a portfolio.

  1. Office – Coworking Space 

Coworking spaces and micro-office units will continue to grow in popularity as more and more entrepreneurs start online businesses and seek a workplace where they can work distraction-free. E-commerce start-ups continue to grow and having a physical office space is critical for their continued success. These businesses do not seek large class A office spaces but instead like the new and trendy coworking locations that also offer amenities within the building. This repurpose strategy can be implemented by any office owner/operator and will prove attractive to a wider variety of tenants. Reaching high occupancy levels is becoming harder and harder for landlords and this innovative strategy may be the gateway to success. 

  1. Affordable Housing 

As housing becomes more expensive and landlords are once again able to enact eviction memorandums, we can expect to see shifts towards affordable housing. The majority of the US population continues to find renting an apartment or home a more affordable option compared to homeownership and this sector is expected to yield high growth. Affordable housing brings a more certain guarantee of payment and allows landlords to feel safe in their projections and yields during uncertain times. Despite below-market rents, this sector has better occupancy and less volatility than market-rate units. Throughout the pandemic, affordable housing rent growth was 1.2% in 2020 and outperformed traditional multifamily (GlobeSt.).

  1. Non-traditional Sectors (Data centers, senior housing, and self-storage) 

Non-traditional sectors continue to provide evidence of resilience through economic downturns.  Data centers are in high demand across the country as we see a massive increase in access to internet-related services and the rise of 5G. These centers need physical space which provides a great investment opportunity. Further, in the next 10 years, the senior population cohort will grow at twice the pace of the past decade and will need to meet a demand of more than 23,000 units per year (HavenSI). This demand spike will provide investors and developers stable and safe investment opportunities. Lastly, the self-storage sector is projected to see annual compounded growth from 2020-2025 of 134.79% (Forbes). Population growth and rental vacancy are the driving factors for this notable increase that will bring bountiful investment opportunities with it.

The trends outlined above illustrate the new high growth and innovative movements of the commercial real estate industry in a post-COVID world. Lever Capital Partners understands the changing landscape of this industry and knows how to adapt to it. Reflecting on conversations with many capital providers at the 2021 Annual MBA Conference, as well as several current clients, we can firsthand see the unspent capital out there in the market right now. Investors are hungry to get back to investing in projects that they believe in and most importantly in ones that are backed by a compelling story. Lever understands the opportunities out there and can provide you with the capital to lead the initiative. Whether your needs include debt, joint venture equity, or secondary financing, we can discuss the capital currently available for your project and work together to guide you to an efficient closing. 

References:

https://www.tylercauble.com/blog/commercial-real-estate-investing-in-2021-trends-markets

https://www.naiop.org/en/Research-and-Publications/Magazine/2020/Summer-2020/Business-Trends/Experts-Speak-on-COVID19s-Impact-on-Commercial-Real-Estate

https://www2.deloitte.com/us/en/insights/industry/financial-services/commercial-real-estate-outlook.html

https://www.multihousingnews.com/post/how-the-pandemic-could-spark-more-conversion-projects/

https://www.forbes.com/sites/stevebanker/2020/07/24/what-will-last-mile-delivery-look-like-post-coronavirus/?sh=29feef683b22

https://www.forbes.com/sites/forbesrealestatecouncil/2020/12/01/a-look-at-self-storage-growth-trends-now-and-post-pandemic/?sh=2468ed472165

Hotel Outlook: Economic Growth, Occupancy, and Airbnb

At Lever Capital Partners we are also seeing positive ADR and Occupancy growth for most of our hotel clients. Given the run up in RevPAR, there has been a slew of development and the commercial real estate financing world is now taking a harder look at new development projects. Commercial real estate lending for new hotels is now only provided for the best owners where the STR report shows a true need for the asset in question. There’s been a bunch of CRE News about Airbnb and the effect that it’s having in the hospitality market but I haven’t seen it given the deals we’ve looked at. Maybe it’s having a greater effect in primary markets like NYC and San Francisco but many of the assets we’ve financed recently continue to have positive RevPAR trends. Overall we continue to like the hospitality segment but are cautious along with the lenders about what might happen if there’s a slowdown in the segment given the increase in average interest rate for commercial real estate loans.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here for more information on economic growth, occupancy and Airbnb in the hospitality sector.

Smaller Metros in the West are Emerging

Our team at Lever Capital Partners has noticed similar trends as we started seeing more smaller metro deals come across our desk the last few years. It’s still hard convincing non bank commercial real estate lenders to do business in many of these markets, despite showing the data that supports commercial real estate financing in those areas. The more cre news similar to this article the better support we’ll have in the future when working on deals in this sector.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about the emergence of smaller and Western metros.