As we can probably all agree, 2020 did not necessarily go as planned. At the beginning of the year, Millionacres wrote up a collaborative report of what we believed would happen in the world of real estate in 2020. Despite some surprising accuracy, no one could have predicted the adversities of COVID-19. Here, writers reflect on their predictions they made a year ago and ruminate on what is to come in the following year.
More retail closures to come in 2021
Since the wonderful, insightful Daniel B. Kline is no longer writing for Millionacres, I’m going to attempt to do his 2020 retail prediction justice.
Dan predicted that store closures would continue into 2020. He also predicted that malls would pivot to add more non-retail establishments to the mix — specifically gyms, coworking spaces, and expanded restaurants.
Well, Dan was correct that stores would continue to shut down in droves during 2020, but one thing he didn’t anticipate was a global pandemic upending life as we know it and forcing dozens of retailers into bankruptcy. As such, as of Nov. 30, an estimated 8,379 stores have closed this year, according to Coresight Research. But earlier in the year, Coresight predicted that between 20,000 and 25,000 stores could permanently shutter in 2020, and with a solid number of weeks left in the year, that number could easily tick upward.
Looking ahead into 2021, it’s clear this trend will continue. There’s not going to be a widely available coronavirus vaccine for at least another four months, if not longer, according to health experts, and given the recent surge of cases, there’s a good chance nonessential retailers will be hit with added restrictions in the coming weeks that will impact their bottom lines. Plus, many consumers are just plain afraid to shop in stores, and given the economic crisis at hand, many also can’t afford to. A sluggish holiday season could therefore pave the way to additional retail closings in the coming year.
All of this is particularly bad news for mall operators, who can’t afford to keep losing tenants — especially department store anchors. It’ll be interesting to see if malls take a proactive approach to the ongoing crisis by expanding their tenant base in 2021 in an effort to get ahead of retail closures. One area they might look to is healthcare — walk-in clinics and diagnostic centers. It may be a little unconventional to sandwich a doctor’s office between a clothing store and an accessory shop, but if it brings in the revenue malls need, so be it.
Eviction moratoria may change with new administration
Oregon’s statewide rent control efforts last year had me projecting a slew of other copycat bills come 2020. Fortunately for investors, that didn’t quite come to fruition.
While some individual cities took aim at rising rents (hello, Portland, Maine) at the state level, we saw little movement.
In fact, in California, renters actually struck down a new rent control bill that would have extended protections to single-family properties, condos, townhomes, and newer multifamily buildings. Though rent control still exists in the state, it’s limited to just multifamily properties built before 1995.
Despite these headlines, though, things weren’t all fine and dandy for rental investors. COVID-19 hit renters hard, and with eviction moratoriums across the country, many landlords were (and still are) left high and dry on rent. Though offering digital rent payment options can help, a large swath of tenants — especially those in higher-cost markets — are still having trouble paying the bills.
According to data from RealPage (NASDAQ: RP), on-time rent payments are down 9% in Portland, 6.7% in Seattle, and 5.8% in Los Angeles. Expiring eviction moratoria at the end of the year may finally give landlords some options with these tenants, but with a new administration on its way into the White House, there’s no telling. We could see additional protections enacted pretty quickly once Jan. 20 rolls around.
Mortgage rates will stay grounded
As 2019 came to a close, I predicted that mortgage rates would fall to record lows in 2020, and this certainly proved to be an accurate prediction. In fact, the 30-year mortgage rate is hovering around an all-time low as I write this at about 2.8%.
Obviously, I had no idea that the COVID-19 pandemic was coming. I simply felt that the economy was going to be weaker than expected due to slowing economic growth and the trade war with China, which at the time was the biggest issue threatening markets. In a nutshell, as we headed into 2020, there seemed to be a lot more that could go wrong than the market was giving credit for.
Going forward into 2021, I predict that rates will stay around their current record-low levels for at least the next year or so. There’s a tremendous amount of economic uncertainty surrounding the pandemic that will likely linger for a while. And the Federal Reserve has made it quite clear that it doesn’t foresee itself increasing benchmark interest rates anytime soon. This is by no means a certainty, and there are some possible catalysts that could cause mortgage rates to rise, but I’d be quite surprised if we end 2021 with average 30-year mortgage rates greater than 3%.
Big venture capital opportunities are upon us
At the end of 2019, I thought nothing could stop the flood of venture capital (VC) money into real estate. Clearly I was wrong. For at least three months of 2020, VC funding was nearly at a standstill. While I did say that venture capitalists would become more cautious, I missed just how cautious by a country mile.
However, the other side of this is how vitally important real estate technology became. When you can’t get into a building, data-based decision-making isn’t just a nice-to-have; it’s essential. I did get it right when I mentioned that virtual and self-guided tours would become more a part of the leasing and buying experience. I had no idea just how much more time we’d all spend looking at real estate in 2020. It’s no surprise that sites like Zillow (NASDAQ: Z) (NASDAQ:ZG) hit record-high traffic this year.
Venture capital did get off the sidelines as fall started. Camber Creek, a VC firm that invests in real estate, announced a $155 million fund to invest in real estate tech companies. With Opendoor coming to market via SPAC (Who knew that would be a hot buzzword in 2020?) and Airbnb going public, big money is pouring into real estate once again. Even SoftBank’s Vision Fund, which was licking its wounds after the WeWork debacle, was back in action as part of a $700 million investment in REEF Technology, a start-up that remakes parking lots. Look for a lot more big funding rounds to hit next year.
And as for my one last prediction about Freddie Mac and Fannie Mae, I was correct that they would remain under government control this year. FHFA Director Mark Calabria has said that the government-sponsored enterprises will probably leave conservatorship by 2022 or 2023. I suspect it will take a bit longer, but I’d be happy to be wrong about that one.
2021 eyes an increase in evictions
I had high hopes for affordable housing solutions in the private market for 2020. It seemed more real estate hedge fund and investment groups were putting forth efforts to provide affordable housing in the marketplace, and while my predictions weren’t exactly wrong, 2020 didn’t bring the solutions I was hoping for.
Low-wage workers, the primary demographic in need of affordable housing, have been disproportionately affected by the current pandemic. With millions of Americans still out of work, affordable housing isn’t the top priority for new developments because of the uncertainty that lingers in this sector. Experts are predicting increases in evictions and unemployment rates as eviction moratoriums expire and the pandemic makes a second wave through the country. Without aid from the government for landlords or tenants, little will be done to motivate owners to reduce rent or provide the financial support to focus on lasting affordable housing solutions.
Rental rates across the board have flattened or declined because of decreased demand for rental housing. Lower rental rates are great, particularly in high-cost markets like New York City, Seattle, and Portland, but that isn’t a long-term solution for the affordable housing crisis. When rental demand returns, increased rental rates will return with them.
Opportunity zones continue to be a great solution for the affordable housing crisis, but the efficacy and profitability of the projects are still unknown as many have experienced temporary delays or are still in the process of being completed. Right now, the recession and global pandemic have done little to help the current crisis, and in many ways they have perpetuated the problem.
Opportunity zones could be quality investments in 2021
Well, that aged like hot mayonnaise.
December 31, 2019, was a pivotal date for opportunity zone investing. It was the last time someone could invest in a qualified opportunity zone and receive the maximum tax benefit. Unsurprisingly, there was a mad dash to invest in opportunity zone-eligible deals and opportunity zone funds at the end of last year.
According to consulting firm Novogradac, more money was put into qualified opportunity zone funds in the last three months of 2019 than what had previously been put into the entire program.
Because of this, I thought that 2020 would be a down year for opportunity zone investment. The extra tax benefit of getting in before the end of 2019 would push people to invest, and then opportunity zone funds wouldn’t raise nearly as much.
That entire prediction got smashed by the coronavirus pandemic.
After the stock market crashed in March as the harsh reality of the pandemic took hold, investors started flocking toward opportunity zone funds. In September, Novogradac reported that funds going into opportunity zones have nearly doubled since January.
There were two things that made opportunity zones more appealing post-outbreak:
- Long holding periods — at least 10 years — would be more than enough to ride out any market volatility along the way.
- Lower rates of return on all investments in a coronavirus world made the slightly lower rates typically offered in opportunity zones more appealing.
Whether this trend will hold in 2021 is incredibly hard to say. The commercial real estate market is recovering, so there may be higher return opportunities elsewhere. Also, the time-sensitive tax benefits of opportunity zones get smaller and smaller each year.
At the same time, there are still monumental tax benefits for real estate investors in qualified opportunity zones, but investors should still look for quality deals with proven developers rather than chase a risky bet simply for the tax advantages.
The need for housing reform still remains
Last year I predicted that clashes over higher-density multifamily development, particularly low- and medium-income, would intensify. I hoped that social responsibility would prevail.
It feels like the entire nationwide argument has been sidelined by COVID-19, although simultaneously the need for housing reform has intensified — and people can agree on the latter, at least. Whether it’s because we need to house traveling healthcare workers, because of the frightening spike in Americans who can’t keep up with mortgage payments, or that the pandemic threw social safety net issues into stark relief, the pendulum has definitely swung toward socially responsible development.
Of course, this could also have to do with the downward spiral in demand for luxury condos in urban core areas. Developers are looking for other products that may have more appeal.
That said, there are probably fewer clashes over high-density development because people are afraid of living in population density these days — are fleeing it, in fact. Many people with privilege are moving to the suburbs or rural regions. And ambitious projects that were approved in the past two years have seen construction stalled due to lack of resources.
Basically, issues of housing inventory supply and demand have been turned inside out and shaken all around by the pandemic, but the need for housing reform remains. It makes sense that it would be prioritized in 2021, because it’s one of the few issues that Democrats and Republicans can agree needs to be resolved.
The Millionacres bottom line
2020 clearly brought about changes to the real estate market that no real estate investor or industry expert could have predicted. Retail is on the decline as malls struggle to bring in the business they need, especially during the holiday season. In the wake of the retail apocalypse, however, we see massive evolution in real estate technology. We see mortgage rates lower than we’ve seen in decades. In many areas of the real estate game, there is hope for investors. In 2021, we hope to spotlight the big opportunities for winning real estate investing strategies while remaining cautious about the risks.