The real estate sector has not been spared from the fallout due to COVID-19 related lockdowns. Like the stock market, not all real estate types are the same, and some areas have experienced more adversity from the lockdowns than others. Retail and commercial office real estate have been hit the hardest. On the other hand, the market for single-family homes has been relatively resilient.
While it seems the economy has bottomed out and the recovery has begun, high unemployment and the prospect of a "second wave" of COVID-19 cases continues to create uncertainty for many businesses. The lockdowns and stay-at-home-orders earlier this year ignited a trend towards people working from home. This put considerable negative pressure on commercial and retail real estate prices. Large and crowded office spaces were no longer desirable, and many local retail stores were forced to close.
However, while many people are still working from home, this current trend's long-term impact remains unclear. Some companies have reported decreased productivity from their employees working from home, which may hasten a return to employees working in the office. Furthermore, while employees working from home may reduce some companies' need for office space, it is also possible that businesses may need more space to provide the safe, socially-distanced working conditions that employees may demand.
The retail sector has also suffered as businesses deemed 'non-essential' by state and local governments struggled to generate sufficient revenue amid various stay-at-home orders and capacity limitations. While the economy rebounded strongly in the 3rd quarter as GDP jumped by a record annualized rate of 33.1%, it has been estimated that nearly 100,000 businesses across the country closed their doors for good due to the lockdowns. Furthermore, a September survey by the National Federation of Independent Businesses reported that 21% of small businesses said they would have to close within the next six months if conditions did not improve. Despite the recent economic growth, empty storefronts from closed companies will likely have lingering impacts on the retail space.
One bright spot in the real estate sector has been single-family housing. Despite the high unemployment rate, the sector has benefited from government protections for homeowners, historically low mortgage rates, and demographic trends. Fewer evictions and better home equity (only 2% of homeowners have negative equity) have prevented a glut of supply like that which contributed to the housing price collapse in 2008. The increase in workplace mobility has also supported home prices. The ability to work from home has allowed people to move further away from crowded city centers and apartment living, driving up demand. Finally, the growing number of Baby Boomers ‘retiring in place’ will continue to put downward pressure on the supply of homes for sale, further supporting prices in the housing market.
Despite the disruptions from COVID-19, there remain attractive real estate areas that can be beneficial for a diversified portfolio. There will also be pitfalls. When evaluating real estate investments, both of these points need to be top of mind.
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Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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