The COVID-19 pandemic has had a profound impact on the world of real estate, both residential and commercial. And while much of that impact has been positive, the pandemic has made things tougher for investors in certain regards. Here are a few ways real estate investing now looks different.
How real estate investing changed for the better
In some regards, the pandemic has been a boon to real estate investors.
1. Borrowing got cheaper
In 2020, mortgage rates plunged to record lows and have stayed competitive since. While we're starting off 2022 with higher mortgage rates than we saw last year, they're still fairly attractive. Because borrowing has been cheaper, it's given investors and everyday home buyers alike an opportunity to scoop up properties.
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2. Rental demand soared
After a brutal 2020 that saw landlords struggling to collect rent and getting so desperate they resorted to costly concessions, rental demand rose dramatically in 2021. And rent prices followed suit. Now, residential landlords are in a prime position to hold steady with higher prices. And those in cities where housing is limited may profit even more in the near term.
3. Industrial space boomed
The pandemic changed the way a lot of people shop. From 2020 onward, consumers have been purchasing everything from apparel to houseware to groceries online. That's caused a huge uptick in demand for warehousing and distribution center space. And it's helped industrial REITs (real estate investment trusts) enjoy huge growth.
How real estate investing changed for the worse
The pandemic certainly brought its share of challenges for real estate investors.
1. Homes got super expensive
While mortgage rates have been competitive throughout the pandemic, home prices have been out of hand. Sellers have been hesitant to list their properties due to the uncertainty that's plagued the country since the start of the crisis. As a result, inventory has been sorely lacking, which has led to a rapid increase in home prices. Not only has that made things difficult for everyday buyers, but it's also posed a challenge for real estate investors looking to add income properties to their portfolios.
2. Retail and hospitality took a major hit
While industrial REITs may have thrived during the pandemic, the retail and hospitality sectors got battered. There were a record number of retail bankruptcies and store closures in 2020, and that's left shopping centers and malls in a precarious position. Meanwhile, travel came to a halt in 2020, which caused a severe decline in hotel bookings. Things picked up in 2021, but hotel recovery won't be complete until business travel resumes at full speed. At this point, though, we don't know when that will happen.
3. Office buildings became obsolete
At the start of the pandemic, many companies shifted to remote work. Two years later, a large number of employers have yet to return workers to the office. That's caused a world of stress for investors in office REITs. And while some companies insist that remote work is not the wave of the future, the longer remote arrangements stay in place, the harder it will be for office landlords to get leases signed.
A clear mixed bag
It's fair to say that we haven't yet grasped the full scope of the pandemic's impact on real estate -- and we may not for many years. But either way, it'll be interesting to see what 2022 has in store for investors.
So far, mortgage rates are already higher to start off 2022, and they could continue to climb. But that could, in turn, cause a drop in buyer demand, which could then lead to more moderate home prices.
Rental demand is likely to stay strong for at least the first part of 2022 as home prices remain high. But that could change during the latter part of the year, especially if mortgage rates continue on an upward path.
All told, 2022 should be a strong year for the industrial sector, and retail and hospitality should hold steady given our strong economy and the fact that consumers have money to spend. The really big wild card for 2022 is office buildings, so we'll need to see what direction the coronavirus outbreak takes before we can make predictions about a widespread return to in-person work.
