2021 Real Estate Trends: Part I
Welcome to 2021.
No one mourned 2020’s demise, but entering the new year has not yet meaningfully accelerated the domestic vaccine rollout, and high infection rates mean at least the first months of the year will contain now-familiar challenges. The biggest implications for the real estate industry remain the changes to life at home and the role of the office. No vertical will escape the impact, for better or worse, of a pandemic that has kept most in their homes and away from offices, hotels, and retail spaces.
Below, we’ve highlighted two of the trends that will influence multifamily — and all real estate — over the course of 2021. We’ll post a second set of trends next week, and continue tracking these and other developments as the year rolls on.
Empty Offices, Wary Tourists
Due to relocations and worker wariness, skyscrapers and office complexes across the country remain mostly empty. Office vacancy rates in San Francisco have reached 16.7%. In October, only about 17% of New York City office workers visited their desks. Many hotel operators face similar problems. Hotel occupancy in New York City the first week of December 2020 was as low as 25%, down from 91% the same week in 2019.
To some, converting these mostly empty structures to housing seems like a natural solution to newly exacerbated housing shortages. Low interest rates and demand for larger homes have placed housing inventory at a 40-year low, and a massive wave of evictions has only been prevented due to new regulations.
Such conversions, particularly of offices, pose challenges, but some have already begun the relatively easy process of modifying hotels. Officials in King County, Washington, plan to create some 1500 housing units for the homeless by converting hotel rooms into housing. Private investors, mostly in Sunbelt states, have purchased hotels and motels, aiming to rent the newly converted rooms to young professionals.
These conversions will almost certainly continue through 2021. Governor Cuomo of New York has made open-ended calls to create affordable housing by modifying existing commercial spaces. Proponents cite the transformation of the Financial District in Manhattan from a business district to a residential neighborhood as proof conversions can succeed. The shift was enabled primarily by converting legacy office space to condominiums and apartments.
The net: zoning issues and divergent quality make these deals potentially challenging. However, for agile, well-capitalized companies, such projects could present an opportunity to reinvent whole swaths of downtowns across the country.
Working from Home Continues
The volume of office and hotel conversions remains up in the air, pending interest from companies with dry powder and clearer instructions from municipal authorities. For now, the biggest implication of the empty buildings has been the intrusion of the office and work into the home.
The latest large round of corporations delaying their returns to the office occurred in October, with companies including Google, DocuSign, and Slack announcing their office would remain mostly empty until summer 2021. Google has since announced another delay, aiming to return its workforce to the office in September 2021. More announcements are no doubt pending.
Once the pandemic subsides, employers will need to ask themselves if employees can stay remote. Individual executives and companies diverge widely in their opinions. Netflix CEO Reed Hastings has expressed that lack of in-person contact has had a negative impact on creativity. Square and Twitter employees, meanwhile, can already plan to work from home indefinitely.
The net: delays like the latest one by Google mean a real picture of post-pandemic office work won’t emerge until 2022. For multifamily investors, this means persistent interest in larger floor-plans, diminished interest in studios, and ongoing flight from expensive urban markets on the coasts to smaller towns and Sun Belt cities.
Check Back Soon for Part Two
Remote work has enabled relocations. Tech workers, young professionals, and new families have all taken advantage of remote work to move out of expensive markets, seeking space and other benefits. Corporations have followed suit, with massive companies like Oracle and Citadel pursuing cost-savings in Texas and Florida. Check back next week for information about these trends and others with serious implications for the real estate industry.
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