No one could have predicted the events of 2020 and their impact on real estate markets worldwide. So, what's in store for 2021? Will the roller coaster ride continue? It all depends on which segment of the market you are surveying.
The pandemic has had a profoundly different impact on residential and commercial markets. In 2021, these two different stories seem likely to continue, creating unique opportunities for different types of investors.
Predictions For Residential Real Estate Markets In 2021
In 2020, residential real estate in the nation's hottest real estate markets took a sudden dive. After years of growth, New York City, San Francisco and many other urban areas saw a drop in transactions and property values. An exodus to the suburbs, especially among older millennials with children, largely accounted for the change.
In 2021, suburban growth seems likely to continue. Here, it is important to remember that even pre-pandemic, many young families were already bidding on larger suburban homes. But this doesn't mean city living is over.
The urban exodus will likely slow, and by the third or fourth quarter, we may see increased transactions compared to 2020. As long as urban markets remain less competitive, we can also expect to see continued opportunities for buyers, including first-time buyers who may have previously found these markets out of reach. These buyers will also likely benefit from increased inventory.
Finally, whether one decides to compete for a home in the suburbs or search for inner-city discounts, interest rates seem likely to remain low in 2021. All of this is good news for residential buyers. Suburban sellers will also likely continue to benefit from soaring values on their properties.
Predictions For Commercial Real Estate Markets In 2021
On the commercial side of the real estate market, 2021 promises to be a much rockier year. It also could be a great year for risk-tolerant investors.
At the beginning of the pandemic, many commercial owners took advantage of forbearance — i.e., forgiven loan payments. With concessions ending but remote work and restrictions on in-person activities continuing, the demand for commercial space remains low compared to this time last year and seems likely to remain low throughout 2021. This situation is bad news for commercial owners. It is also bound to create incredible opportunities for investors.
As more commercial spaces remain empty, a growing number of owners will be eager to liquidate and willing to do so at increasingly discounted prices. Lower leasing prices will also make holding on to commercial properties less attractive and potentially unviable. For investors, 2021 could offer a once-in-a-lifetime opportunity to build up a strong commercial property portfolio. But this raises an obvious question: With demand for commercial spaces in decline, is this really a good time to invest?
Opportunities For Commercial Investors
In real estate, the biggest winners are the true pioneers. They are people willing to move into territory no one wants or views as viable. In 2021, it may seem counterintuitive to purchase a vacant office building, but these empty spaces may be tomorrow's gold.
Assuming that many companies go permanently remote, even post-pandemic, office spaces will remain in lower demand. Still, this is no reason to assume that office buildings will permanently lose their value. Many currently vacant office buildings are located in the country's most highly valued real estate markets. The real question is whether these buildings will reopen as office spaces or be reimagined from top to bottom.
In August, the Harvard Business Review published an article by four designers on the future of office buildings. Among other speculations, they suggest that post-pandemic, many office spaces will be repurposed as multiple-use spaces. For example, an existing office building may be redesigned to house a combination of workspaces, gyms and restaurants. As the article's authors observe, there is nothing new about "distributing spaces and services throughout one slice of real estate." This has been happening in the hospitality industry for well over a decade — e.g., short-term commercial rentals. Post-pandemic, this trend seems likely to expand.
Another possibility is that at least some office buildings will be repurposed as residential buildings in a post-pandemic world. For office buildings to be repurposed for residential use or alternative business use, however, it will take more than the imagination of designers. City planners will also need to get on board and rethink existing zoning bylaws, which typically restrict how different types of buildings can be used in specific districts.
With a bit of ingenuity, municipal cooperation and investor risk-taking, the future of commercial real estate could be bright. As we move into 2021, the question is how many investors will be able and willing to pursue the future's potentially greatest opportunities.