As COVID-19 develops, the real estate sector hasn’t stopped surprising investors. Known developments include residential markets booming, commercial properties shifting their focus, and more.
As the vaccine starts to become more readily available, multiple experts have started to analyze the consequences. Several flourishing markets include previously-negligible demand drivers. Shortly, many of them could become vital for recovery.
Staying on top of these changes can make a prominent difference for property managers this year. Which demand drivers should you keep in mind?
Office space in the post-pandemic
As expected, office space is still struggling with maintaining demand. As the pandemic developed, home offices became the norm. It's easy to see why social distancing and crowded offices don't get along too well.
That means office space has stagnated in demand, even with upcoming vaccination. However, we might see a significant bounce since not everyone works better from home. The same holds for training and onboarding workers, which traditionally requires physical proximity.
Possible 15% slump for office demand in the US
However, it seems like it’ll still take a while before office space can become relevant again. As Globes reported, two noticeable trends are responsible for the office sector’s slump. According to them, these trends are social distancing and remote work policies.
Luckily, the article does mention that office space is unlikely to disappear. It’s easy to believe that no one wants to return to their offices. However, the article mentions that 10% of workers might prefer to relocate permanently to their homes.
While that's a notable increase, it's far from representing the majority. While demand won't recover completely, office space won't cease to be profitable.
Which markets promise an upcoming boom?
On the other hand, there’s no shortage of articles going through promising markets in 2021. Many of the mentioned markets are easy to expect. The housing market has seen prominent winners, particularly in more isolated areas.
However, vaccination and recent developments have brought new potential players into the picture. Lower demand decreases the prices in larger cities, making them more attractive. People adopted new needs, like open spaces and support for all the software they've implemented.
Suburbs and smaller towns
Some of the most demanded housing markets were outside more prominent cities. People often avoided these properties because they were away from job opportunities. That's why small apartments in the capital were often more expensive than large houses in the outskirts.
Remote work drove thousands of workers to their homes. Remote work eliminated the need for staying in large cities since commutes weren’t an issue most of the time. This trend could slow down as prices adjust to the increased demand, yet it’s unlikely to stop soon.
Cities could make a comeback
The benefits for the suburbs were detrimental for capitals and large cities. Since their main attraction was being close to job chances, social distancing and work-from-home policies negated virtually all advantages they offered. That’s why
However, the same decrease in demand has driven prices down in some of the larger cities. What does this mean? These cities are in a similar spot as suburbs when the pandemic started. As their outskirt counterparts increase in costs, cities will become more attractive, especially with people returning to their office.
Storage and logistics
Regardless of how the epidemic impacted the world, one thing remained true: people still needed food and inventories. That’s why warehouses and similar properties barely experienced any setbacks during the pandemic.
As various industries start to recover, storage and logistics will remain vital for keeping inventories and enabling supply chains. Additionally, online commerce reduces demand for retail space, but they'll also need somewhere to keep their physical products. With their continuous growth, storage might become more important than retail fronts in the future.
Data centers
The pandemic, remote work, and the need for online collaboration took countless companies to make technology implementation a priority. Today, virtually all digital apps are cloud software. That means they depend on top-quality servers around the world.
These locations are data centers. For those who don't know, they require warehouses and similar facilities to keep the servers. It offers plenty of investment opportunities, like repurposing unused office spaces. As technology becomes more critical, this demand will only increase.
Open space amenities
Finally, open spaces have become the main priority for anyone investing in real estate. Ventilation and room for social distancing are critical for maintaining healthcare measures. As people get used to these amenities, they'll likely gravitate toward them when investing in properties.
In other words, open malls and offices—as well as properties near parks—will enjoy greater demand. Additionally, renovating existing assets to accommodate these needs is also a great option.
What does this mean for the real estate sector?
2021 is a sea of opportunities for anyone who can spot these changes. As several experts have pointed out, the difference will lay in embracing innovation and versatility. Property managers and investors will need to focus on how the industry evolves and adapt accordingly.
That linked article from Colliers focuses on the Singapore market, showing that these expectations are valid for different regions. The article goes through different viewpoints from two real estate experts.
Let’s see what we have to say.
Looking toward leasehold properties
One of the first observations from the article is how most prime areas are currently leaseholds from the government. The state handles planning and reclamation for Singapore's business district.
Interestingly, returns and yields from these properties could be more attractive than their freehold counterparts. Upfront costs are lower, and the same goes for upside rent. For instance, the article mentions 3% yields on leaseholds against freeholds' 2%.
Promising outlook for healthcare real estate
The article also mentions the growing demand for real estate on the healthcare front. They mention a combination of the hospitality and healthcare sectors. It makes sense, considering recent repurposing projects within hotels.
We’ve also seen plenty of upcoming developments centered around healthcare. It makes sense, given the huge demand, even during recovery. Vaccination is also a strong reason to focus on healthcare real estate, and it’s a worthy consideration for future investments.
Hospitality recovering slow but steady
We already mentioned this sector, so let's focus on it now. Most experts agree that hospitality has been among the most prominent victims of the pandemic. However, they also agree that the tourism industry will never die.
On the contrary, the pandemic has done little but increase people’s desire to travel. You can ask your friends, and at least one will tell you they’re just waiting until they can travel. With the vaccine, people will likely flock toward airports and travel agencies.
So, where’s the demand coming from?
We've already discussed how various sectors will benefit from increased demand during this year. We haven't mentioned exactly what's driving this demand—at least not specifically.
As you might have inferred, the pandemic nurtured most demand drivers responsible for the upcoming surge. All the following causes come from the pandemic and, more prominently, healthcare measures.
1. Remote work
We've mentioned it extensively by now, so let's begin with the most apparent demand driver. Remote work has bred countless shifts in as many markets. It's responsible for the current housing sector balance and the downfall of office space.
Remote work will continue to drive demand to and from multiple sectors. Office space and major cities are likely to keep their current trends for a while. Suburbs, coworking spaces, and even good internet access will be crucial considerations when investing.
2. Pent-up travelling demand
There’s not a lot to say here since we just talked about it, but frustrations over traveling restrictions will drive the rebound for tourism and hospitality real estate.
From our main demand drivers, traveling demand might be the weakest one for the short-term. As vaccination becomes more commonplace and traveling regulation subsides, it could be a significant market driver.
3. Innovative ventures
Innovation will continue to drive the market as COVID-19 recedes and people get used to the "new normal." We're talking about repurposing existing spaces to accommodate recent trends, like coworking and the importance of cloud software.
Companies who understand what will become standard after the pandemic can invest accordingly for their competitors' significant advantage.
4. Digital adoption
The pandemic also turned dozens of companies toward digital adoption. The need for more advanced software and features could be a surprising driver behind industrial demand.
For instance, we already mentioned that good internet access is vital for property investment. Proximity to data centers and similar characteristics can make specific properties significantly more attractive than traditional assets.
5. Returning to “normal”
Finally, demand has been unstable or "outside of the norm" during COVID-19. We already see the first signs that the crisis is about to finish. As people go back to normal, demand will do the same—as far as possible.
Things will not be 100% like they were before, but we can expect a stabilization process. That means reaching a middle ground between pre-pandemic and pandemic economic environments.