The coronavirus pandemic continues to be a lingering cause of uncertainty in the real estate industry; however, large-scale vaccination efforts, a drop in reported COVID-19 contractions and eased social distancing protocols are beginning to prompt investors to become more active. Financial support from federal and state governmental entities have averted a massive wave of anticipated defaults on retail leases, although there is still some degree of concern regarding potential rises in the number of residential delinquencies—especially as national eviction moratoriums are starting to approach their respective expiration dates. The projected forecast for office REITs is still largely unsettled and will most likely remain so until it is confirmed whether or not the transition to telework is a lasting effect of the virus—although the predominant trend has initially indicated that the majority of employees will eventually return to physical office spaces in at least some capacity. Although net debt within the real estate sector is comparatively low from a historical context, the underlying risk to cash flow continues to present a significant challenge to many REITs.
Real estate experts have cited increased transactional rates in the sector in recent months will help bolster the sector’s continued development. The 2021 U.S. real estate prediction issued by the National Association of Realtor’s chief economist anticipates that home sales in 2021 will increase by 9%, home values will jump 3%, new home sales will increase by a considerable 23%, and home mortgage rates will increase only 1/10 of 1%–all of which are promising data points for stakeholders. The housing sector overall outperformed the overall economy in the immediate aftermath of the pandemic as buyers and sellers created methods to circumvent COVID-19 restrictions. A number of factors aggregated to fuel housing demand and are expected to continue to do so throughout Q3. These include sustained strong economic position of high-wage teleworkers, increasing expectations that remote work will persist at least in some capacity following the pandemic, historically decreased mortgage rates and an increasing number of millennials aging into ideal home-buying age. Homebuilder confidence has stayed high as supply chains remained largely unaffected.
Despite the noted market uncertainty, there are some exceptions to projected performance for Q3. The high demand for warehouse and distribution spaces has consistently outstripped supply levels, leading to rapidly increasing rent prices. Along with a similar spike in home values due to low mortgage interest rates and a widespread exodus from urban areas, REITS focusing their assets in the single-family residential rental and manufactured home markets are ideally positioned to reap the rewards of the current real estate market environment. If the economic growth sustains its robust pace, employees returning to work, and interest rates staying law as the Federal Reserve extends its favorable monetary stance, the real estate sector could potentially have a very strong performance during the upcoming market quarter. The sustained low interest rate in conjunction with a surge in demand for office and retail spaces could prove to be a lucrative opportunity for real estate investors seeking yield and attractive valuations. There is some concern within the industry that the demand for housing will eventually cool due to decreased affordability. Average home value increases are predicted to substantially outweigh the effects of low mortgage rates on demand. Additionally, interest rates are predicted to rise in the near future as the economic recovery continues to develop. Still, despite the anticipated ebb in demand, it is still likely to exceed supply as builders face increases in lumber costs and land-use restrictions.
From a long-term perspective, an aging population base will likely mean that over a quarter of the nation’s existing owner-occupied residences will gradually hit the market over the next couple of decades—ultimately easing the inventory crisis and increasing affordability.