The world is experiencing a decade’s worth of social and economic change, compressed into a single year. With such rapid change comes greater risk for investors—and great opportunities. Keep an eye on the following trends, as you navigate the choppy waters of 2020.
High Unemployment, Slow Recovery
The last time the US saw double-digit unemployment was the aughts. Specifically 2009, in the throes of another financial crisis.
Unemployment leaps upward during recessions, then gradually floats downward over the course of years. As a lesson from the Great Recession, it took an entire decade (2007-2017) for the unemployment rate to recover its pre-recession level.
Of course, unemployment doesn’t strike evenly. The Rust Belt, Northeast, and California are all suffering worse unemployment than the rest of the country; take a look at this interactive map showing county-level data:
Note that in recessions, affordable housing tends to do well. Even in a worst-case scenario for unemployment, Damian Bergamaschi showcases how affordable housing like mobile home parks don’t get hit too hard. Indeed, real estate in general proves far more stable in recessions than stocks and other asset classes.
E-Learning Costing Private Colleges (and College Towns)
Online learning became compulsory just about everywhere in the US in the spring of 2020, and largely continues entering the fall semester. And as a sign of the times, Google searches for “online course” doubled earlier this year.
But it raises some fundamental questions about the value of college education. If a student can have the same educational experience for $4,000/year through an online university, why would they ever pay $40,000/year for a private liberal arts college?
The majority of US colleges have seen a drop in new student enrollment of over 5% for the 2020-2021 school year, per CNBC, which notes that analysts worry hundreds of schools will close permanently.
For real estate investors in college towns, that has profound implications. Even when colleges don’t close their doors entirely, an online or hybrid model will mean drastically lower demand for student housing, and for the local economy in general.
Beware of investing in any market that relies on a single employer or industry. You never know when they’ll disappear.
Much has been said about the rise of remote work in 2020. According to a Gallup poll, three in five workers plan to keep telecommuting even after the pandemic.
That has profound implications for today’s expensive office space. Employers are finding they can get by just fine with remote work, and don’t need to blow an enormous budget on office space. Many are scrambling to get out of long-term leases, and that leaves commercial landlords in serious trouble.
Particularly in the most expensive, largest cities.
I love city living, but it’s certainly lost some luster in 2020.
There are two broad reasons to live in a city: convenience to get to work, and access to entertainment and cultural amenities. The first is being decimated by the explosion in telecommuting, the second by mass closures of restaurants, bars, museums, and other amenities due to the pandemic.
With so many people able to work from anywhere, not just the expensive market near their company’s headquarters, more workers have been eyeing smaller cities, towns, and rural areas. A Harris poll found that more than double the number of urban residents (43%) are looking for a new home compared to rural residents (21%):
And let’s be honest: even people who support social movements and protests don’t enjoy a front-row view from their home. My wife and I lived through protests and looting on our block in Baltimore a few years back, and after a sleepless night guarding the door with bear mace, my wife told me in no uncertain terms that we were moving out of the city.
Real estate investors should reevaluate their investing strategy in the wake of these changes. Keep an eye out for declining demand in the largest, most expensive cities, as Americans migrate to second-tier cities, more rural areas, and even moving abroad. As an expat myself who enjoys free housing, excellent healthcare, lower income taxes, and a much lower cost of living, I can assure you that it’s a good life. My wife and I maintain a 60% savings rate, largely because we live overseas.
Tourism: Weaker in Urban & Flight-Necessary Destinations
For all the reasons outlined above, urban tourism has suffered in 2020. It’s simply not a great time to visit large, densely populated cities.
Likewise, destinations that typically require a flight to reach have also seen a collapse in tourism. Air travel in June was down 86.5% from a year earlier, according to the International Air Transport Association.
People are still traveling, but they’re doing so by car this year. Mountain destinations, nature destinations, easily accessed beach destinations, and other get-out-of-the-city travel have surged in 2020.
Like everything else in 2020, vacation rentals have not been hit evenly. Keep an eye out for opportunities, while also watching for heightened risk.
The last time we talked about “household bundling” was the Great Recession, when people who would ordinarily live separately moved in together to save money. Think twenty-somethings moving back in with their parents, young professionals sharing a two-bedroom apartment rather than each renting their own one-bedroom, and couples moving in together a bit earlier than they might otherwise.
There’s no easy data on household bundling, so I can’t demonstrate this with statistics. But anecdotally, it seems both widespread and obvious. My much-younger siblings have all moved back in with my parents—a trend followed by most of their friends. I’ve heard similar stories from many different sources.
This creates yet another trend pulling down demand for urban housing. The 23-year-old who would be renting a downtown apartment in a hip neighborhood is now living with mom and dad for the indefinite future, trying to find a job. That leaves the landlord of that downtown apartment with fewer applications and longer vacancies.
One way that real estate investors can protect themselves from these kinds of demand shakeups is to invest in an area with hyper-stable housing demand from a near-guaranteed employer. For example, housing near military bases always enjoy strong demand—if at the expense of high turnover rates.
One of the buzzwords you can’t escape in 2020 is “uncertainty.” In the face of all the economic and public health uncertainty, fewer renters want to renew long-term leases.
One survey by HousingWire found that a mere 26.1% of renters plan to renew their lease agreements when they end. Among more expensive leases of $1,750 or more, even fewer (18.7%) planned to renew:
That should worry landlords, for whom most of the labor and expenses involved in owning rental properties come from turnovers. See a visual breakdown of how rental cash flow works here.
The potential for high turnover rates marks yet another way that the coronavirus pandemic has impacted real estate investors.
No one is safe from disruption in 2020.
As pundits drone on about “the new normal” and overuse words like “unprecedented,” keep the above trends in mind as a real estate investor. No one knows for certain how permanent they’ll each prove, but I personally suspect that many—if not most—white-collar workers will continue telecommuting long after COVID-19 disappears. That has profound implications for both commercial office space and expensive urban and suburban residential real estate.
For all the headlines about real estate bidding wars, I still can’t sell or rent my vacant urban rental property. There just isn’t the same demand to live downtown right now.
What trends do you see impacting real estate markets right now? How do you plan to capitalize on them?
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