Real Estate Opportunities Post Covid-19

Where to look for the best deals to make money

I understand that this is a delicate moment and a delicate subject. There are people all over the world who are suffering, and I am about to write an article on how we as investors can benefit from it. I want to start by saying that I truly feel compassion for all those severely affected by this pandemic, and in no way do I want to discount that. Having been through two previous market crashes, I know what kind of pressure this can cause. As much as I wish this didn’t happen, I don’t want to close my eyes to the fact that it could create opportunities for those who are prepared. I’ve thought about writing this article for weeks, but haven’t been able to really put anything together. The reason for my struggle is that I am primarily a residential real estate investor and honestly I don’t see an influx of opportunity in that type of product. That said, I think we’ll see some opportunities in other types of products, and possibly residential in the future. This is what I think could happen as we get through this crisis.

OFFICE:

Office is likely to be the hardest hit asset class in real estate. With the recent closures, most companies that occupy office space have sent their staff home to quarantine. I don’t have the statistics, but there is a high percentage of people who can work from home who are working from home. Offices are practically empty in most cities. So why would a company continue to pay rent when they are not using the office? Well… many are not. Businesses across the country have stopped paying rent on their office space, and most office building loans are from commercial banks with little flexibility on payment deferrals. There are foreclosure moratoriums spread across the country that could be playing a role, but we are yet to see a wave of foreclosures. That could easily change. As we work through the government stimulus, which is helping office owners, and employers decide to reduce or eliminate office space, more and more office owners will face financial hardship. Combine this with the decline in property values, and it will be a challenge for homeowners to keep up with or refinance debt. Personally, I will stay away from the office, but I think there will be incredible value in the near future.

APARTMENTS:

Because this will be the most similar to residential, it’s an asset class that I understand much better. Behind the office, I think this area will be the most affected. I know this will turn me off, and many investors think neighborhood retail is in trouble, but before you stop reading, let me explain. First, I am limiting this argument to Class C apartments. Class C would be the lowest income buildings. The reason I think this will be affected the most is because of the unemployment numbers. If you dig into the numbers, there is a sad discrepancy. The American who does not work is the hardest hit in hospitality and the minimum wage worker. As of today, most of them are making more money from unemployment than from work, so we haven’t seen a big drop in rents paid. That will change at the end of July when the federal share of unemployment stops unless the new stimulus plan passes and extends this deadline. The federal piece is $600 a week for everyone who is unemployed, regardless of how much they were earning before they lost their job. When that expires, unemployment payments will drop to about 50% of previous earnings, which is not enough to support this demographic. In time, businesses will come back and people will regain the confidence to get out of the house and spend money, but while we wait for that, unemployment will continue to be a problem and paying rent for these kinds of apartments will be a problem. Two other areas that will be affected include small retail that has small restaurants as tenants, and self-storage. I think small retail stores could see a pretty big impact as their tenants struggle to get back into business (many won’t survive), but storage will do better. It’s common in tough times to see families consolidate, so I think it’s possible to see lower vacancy rates and higher rents with storage.

On the residential side, I don’t think we’ll see much change. I think everything remains the same, at least in the short term. I’ve written about my take on the impact of COVID-19 on housing and posted videos on our channel, so I won’t go into too much detail here. If you haven’t subscribed to our channel yet, do so. We hope to increase subscribers and you can help. Although I don’t expect much of an impact, there is a chance that we will see an increase in foreclosures in 18 to 24 months. Most non-jumbo loans are owned or guaranteed by the government. All loans in this category qualify for automatic forbearance, which I discussed last month. Those deals expire 12 months after they start and then it will take some time to determine which borrowers can get back on track and which can’t. My guess is that loan servicers will be much quicker with their foreclosures than they were in 2008, so I expect problem loans to make their way through the process quickly. Although this is a real possibility, I don’t think it’s likely. The services have a great deal of latitude to work with their borrowers after forbearance expires, which should prevent many foreclosures. I also believe that our economy will recover for the most part at this point and unemployment will return to a manageable level. If I am not mistaken, business will be business as usual for residential investors. Although I am optimistic, my eyes are open to what is possible.

OWNER FINANCING:

I hear a lot about upcoming opportunities subject to investments or other transfer-of-owner transactions. Although I believe that these opportunities are coming, I believe that it is much further ahead. I will discuss this in more detail next month.