At Origin Investments, we take great pride in being transparent with our investors. That’s why I grade my predictions from the prior year when I release my new predictions for the coming year. Despite the shock of the COVID-19 pandemic, I managed to get 95% of my predictions for 2020 right. You can read a recap of last year’s predictions here. The important takeaway is that our intellectual capital and insights at Origin withstood a global pandemic. The trends we’re riding to success for our private real estate investors are as strong and right* as ever.
This year, the commercial private real estate market will start to recover from the pandemic, but it’s going to be a bumpy recovery. Things might get worse in the first quarter and into early quarter two for select segments of real estate because of the worsening pandemic. Certain real estate segments are set to soar while others will struggle. Geography and affordability will be the biggest drivers in the private real estate market.
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Hopefully, vaccines will become more widely available by the middle of the year. By then, businesses will start reopening and hiring people. But it won’t be until late in 2021 that we’ll get clarity on the outlook for office, hotels, and other segments as the new normal begins to take shape.
At Origin Investments, we’re staying true to our roots this year. If last year’s shock taught us anything, it reinforced that we’re on the right track with how we’ve positioned our portfolio for the short- and long-term. And we’re confident that we can continue to deliver high absolute returns and manage risk no matter what the rest of this decade has in store for us.
Here are the most impactful private real estate trends we’ll see in year 2021:
1. We’re not in a bubble.
That said, investors are willing to accept a lower return because the risk-free rate is zero. And because the stock market returns going forward are probably much lower than you think. Expected returns are going down in every asset class.
2. The exodus from major cities continues.
If you’re sitting in New York City, Chicago, or San Francisco, wondering how to stem the tide of people leaving, the answer is you won’t. It’s going to keep happening.
3. Shift to low-cost, business-friendly states.
Today you can work and get a New York City salary but live in Austin or Nashville. And Texas and Tennessee don’t impose state income taxes. Or you can work for a company based out of San Francisco and live in Denver, Phoenix, or Charlotte. These are just some of the explosive growth cities that offer a better lifestyle, lower cost of living, and better weather than New York City, Chicago, and San Francisco.
4. Affordability will be the biggest driver in 2021.
There’s mobility in the workforce because workers no longer have to work in a big city office. People are going to keep moving to affordable cities because they can work virtually. There’s no need to worry about a one-hour commute anymore.
5. Qualified Opportunity Zone rules are at risk of revision.
You’re probably going to see some movement on revising rules governing qualified opportunity zones. I don’t yet know what exactly it’s going to be. New rules could require partnering with community groups to more onerous reporting. Or they could demand approval of projects by Treasury. And redrawing the maps is still on the table.
6. Demand remains weak for office space.
Even as the economy reopens and people go back to work, the office market will remain under pressure. The reason is because many employers now know they can operate a hybrid or virtual office without hurting productivity. And it’s much less expensive than paying for traditional office space.
Let’s say you’re a mid-sized business in Chicago and you have 5,000 square feet of office space at $50 a square foot. That’s a $250,000 annual line item, plus another $50,000 in utilities, services, and insurance. Or you could get a monthly license to Zoom or WebEx for about $100.
7. Interest rates will not increase.
The Federal Reserve fears a recession more than inflation. The Fed will keep suppressing rates until at least 2023.
8. Urban and suburban multifamily valuations go higher.
There’s a tremendous amount of equity that’s looking to invest in multifamily. The majority is flowing to suburban, but some is moving into urban. Borrowing rates are sub 2.5%. If you can generate an unlevered 4.5% on a core asset, for example, you’re looking at 6.5% returns. It’s interesting if you think there’s potential for rent growth on your property.
9. Suburban multifamily rents will start showing real rent growth by the spring.
This trend will begin in spring and continue through the second half of the year. The multifamily real estate segment is where demand continues to grow. Additionally, occupancies are already tight. As the economy normalizes and incomes rise, multifamily is one segment where you’re going to see rents grow.
10. Multifamily rents in urban Class A will remain weak.
Even as people get vaccines and the economy recovers, there are too many people that have left cities for multifamily urban Class A rents to rebound. Plus, there are plenty of properties with many vacancies. A recovery will take time. It will be a process, not a singular event, and it’ll take through at least this year.
Bonus: Your best data and intelligence will come from talking to people
Talk with people when investing in private real estate. Don’t just look at data and conclude that you’re making the right or wrong decision. For one example, pick up the phone and call people in your network who are partners at law firms. Ask them what the partners are discussing. Law firms are one of the biggest renters of Class A office space in every city. I can guarantee you they will tell you that partners are talking about how to reduce office space because it’s their biggest expense other than salaries. Talking to people leads to insight.
