taking shape amidst
Investors are reimagining their portfolios and embracing alternative opportunities for growth in new markets and sectors
The pandemic-induced economic downturn has created one of the most bifurcated real estate markets in recent history. While some industries are thriving, others are facing massive disruption. The value of industrial assets is higher than ever before—doubling in many markets—but other industries are facing real challenges as well as new opportunities.
To make up for unexpected losses and a changing economy, investors are pivoting their strategies and looking to alternative opportunities for returns. Learn about the latest investment trends gaining momentum into 2021.
1. Investors are spending billions on single-family rental homes
Institutional investors have increased the demand for residential real estate throughout the pandemic. Previously a niche sector for a select few large players, the single-family rental home market now boasts plenty of new investors who recognize the opportunity for significant returns.
Investors started buying large blocks of single-family rentals when the Global Financial Crisis put an influx of foreclosures on the market from 2007 to 2011. But recent innovations in PropTech have enabled investors to manage their portfolios in ways that didn’t previously exist – accelerating interest in the sector.
Investors are also paying close attention to single-family rental REITs that have outperformed the broader REIT market in 2020 by 23%, exceeding traditional REITs focused on multi-housing (-9%), office (-22%) and shopping center (-33%) sectors. Institutional investors with more than 100 homes in their portfolio make up just 3% of total single-family home inventory, leaving an abundant opportunity for further expansion in the market.
In the Atlanta area, Haven Realty Capital recently closed on a $133.7 million capitalization of a six-property portfolio of new and to-be-built homes. Other firms are taking an alternative approach. Global investment management company, Nuveen, recently invested $400 million into a single-family rental start-up that supplies leasing and management for single-family rental homes. In addition, RangeWater Real Estate secured an institutional equity partner to deploy $800 million into built-to-rent developments, and Pretium and Ares Management spent $2.4 billion for Front Yard Residential.
2. Demand for single-tenant assets is robust during the pandemic
Investment in single-tenant assets captured nearly a fifth of all CRE transaction activity in Q2 and Q3 of 2020 - double the last cycle.
Amidst broader market uncertainties, long lease terms and strong occupier credit are major factors driving the demand for single-tenant net lease assets. The retail sector saw the most pronounced shift. Single tenant assets represented nearly 40% of total deal volume in Q2 and Q3 2020, more than double the average from 2010 to 2019. Similar dynamics were seen in both the office and industrial sectors as well.
The tech industry is also a major player in this trend. Brookfield recently bought a property in Bellevue, Washington for $365 million and Swift paid $345 million for 10 buildings in Cupertino, California, all properties are entirely leased by global technology firms. And we’d be remiss to leave out the biotech industry—which has remained incredibly strong throughout the pandemic. This year, Alexandria RE acquired two assets occupied by biotech giants Moderna and Jazz Pharmaceuticals in deals totaling $220 million.
While single-tenant office acquisitions in Q3 more than doubled those in Q2, they are still significantly down from a record-setting 2019 investment year – but the last quarter of 2020 is off to a strong start.
3. The Sun Belt is outperforming many gateway markets
Over the past five years, investors have been increasingly drawn to high returns and heightened demographic momentum in non-gateway cities. About 67% of the total transaction volume in the United States came from non-gateway markets so far in 2020, up from 57% in 2015. Multi-market headquarters site-selection and expansion activity continues to favor high-growth Sun Belt cities. High taxes – exacerbated by limits on the deductibility of state and local taxes (SALT) – creates an economic incentive for individuals and businesses to relocate to low-tax, pro-business markets.
Distributed workplace models and the competition for talent have been significant drivers for the increase in demand from institutional investors. By the end of the last cycle, non-gateway cities like Austin, Charlotte, Atlanta and Dallas were outperforming many of the top U.S. gateway markets in terms of real estate returns.
Tech is among the industries adopting a distributed workplace model between gateway and non-gateway markets. The goal? To attract the highly educated young talent that’s looking for better quality of life and a lower cost of living. As a result, not only is there an increased need for office space, but secondary markets have become more exposed to innovation and opportunities for growth. Recently, three of the world’s most recognizable technology corporations have taken up a total of 6.2 million square feet in Austin, and another global software company is creating 1,500 jobs in Atlanta as part of an expansion.
In the wake of the pandemic, in-migration to non-gateway cities has continued. Housing search data and address changes indicate that Phoenix, Austin, Dallas, and Nashville are top destinations for those who are choosing to leave cities like Los Angeles, New York, and San Francisco – however, it’s too early to say how permanent these changes are.
As the year comes to a close, investors are beginning to reimagine their portfolios and embrace new ways of working. This is providing significant opportunities for real estate lenders who are looking for growth and increased financial returns in new markets and sectors. Disruption as we have seen this year is often a critical breeding ground for innovation and success.
Contact us to learn more about the latest investment trends shaping the industry.