As the economy starts to open up again, one of the key questions is what is the lasting impact of COVID to existing real estate properties and new investment opportunities. There is no black and white answer. The impact depends on many factors including the type of property, the tenant base, the financials of the property, the location and many other variables.
There are lots of "experts" making complex predictions using all kinds of historical data and statistical models. So how is a normal investor to decipher all the data to determine if they should invest in that new real estate opportunity? Although an investor can immediately start assessing all the data on a specific deal, we recommend that you first ask yourself a simple question. Am I comfortable investing my capital in this real estate category?
In just a few sentences, we give our thoughts on which categories we believe will fair much better than others long-term.
We believe that most multi-family properties have some short term risk but limited long term risk. Properties with high (90%+) occupancy, low interest debt, and an established property management team will be able to minimize their cash flow impact from COVID. Rent shortfalls will limit near term cash distributions to investors but over the long term, we believe the multi-family properties will continue to be a safe bet. The US rental market will continue to be healthy as the demand for apartments will continue to outpace supply for the foreseeable future.
In the next 12 months, student housing will take a significant impact. Historically, this has been a very safe category but with COVID, the dynamics have changed. With many universities shifting to online classes for the upcoming fall and winter terms, housing contract cancellations have accelerated for the upcoming school year. This will result in limited investor distributions in the near term. We believe that investors should remain calm and this category will recover and continue to be a safe bet for the long term. Similar to the multi-family market, there continues to be a shortage of high quality student housing near most major universities. Post COVID, students returning to campuses will be seeking new contracts and student housing should see improvements in profitability.
Although the self storage market is becoming more congested, we believe this category will continue to do well both short term and long term. COVID has resulted in an increase in delinquent payments but overall, the cost per month to rent a self storage unit is not a major financial burden for most consumers. While some consumers are delaying their storage unit payments, as the threat of auctions near, we believe most unit renters will pay off outstanding balances. Overall operational costs are low for this category as automation has increased. This allows a faster return to profitability. Long term, we believe demand will continue to be healthy for newer, more automated facilities.
Retail centers have high short term risk and long term risk. Most centers have seen a significant short term impact from COVID-19. Rent collections range anywhere from 25% to 75% depending the number of essential businesses that a center has as tenants. COVID accelerated the pace of online shopping and we expect that many retail centers that do not adjust their tenant base to the new reality will be at high risk of collapse long term. Before investing in these deals, investors should perform an in depth analyses on the financials, the debt structure and the tenant base of any retail center before investing.
Hotels have taken a significant hit from COVID. Similar to retail centers, investors need to be wary of investing in upcoming hotel opportunities. We expect a large number of "Post-COVID deals" where sponsors will discuss the large discounts on the properties. On any of these deals, its critical to evaluate the speed at which revenue will return. Larger properties are dependent on revenue from business travelers, business conferences, weddings and other events. Unless an investor has the stomach for high risk and has performed significant due diligence on the deal, we recommend that most investors shy away from hotel opportunities for the near future.
Finally, lets talk about offices. We are quite negative on this category both in the short term and in the long term. While the immediate impact is limited, we believe COVID will fundamentally change the landscape of the office category in the future. Office costs are a major expense for many businesses and COVID has shown companies that a "work from home" model is possible. Companies will reassess if they can deliver higher productivity at lower cost by permanently shifting a subset of their employees to work from home. The downstream impact to office space requirements will be significant. While this shift was already happening slowly, we believe that COVID has created a tipping point for companies to reassess their long term office space requirements.
In summary, as an investor, while its good to read the expert analyses, we also believe its important to rise above the marketing materials and see the forest from the trees. Before analyzing an investment opportunity, ask yourself if you are even comfortable with investing in that particular real estate category. If the answer is yes, then begin the next level of due diligence.
Good luck investing!