Larry Goodman is COO of HomeVestors of America.
You’ve likely seen numerous articles about the big move away from the city. From employees taking advantage of work-from-home opportunities to employers appreciating more cost-friendly office spaces—it can seem as though no one wants to live, work or play in a metropolis anymore.
But what does this all mean for commercial real estate? For starters, it seems like there may be more opportunities in the suburbs than in the city right now. However, over my long career in commercial real estate, I’ve seen the economy do a lot of things. Just because urban properties don’t seem to be holding the value they once had doesn’t make them bad investments overall. In fact, now could actually be an opportune time to grab up urban properties; it’s all a matter of perspective.
So how did we get here? Combing back over the last few years, you can see where it all started.
Zoom Town Trend’s Impact On Urban Real Estate
Millennials happen to be the smallest group of homeowners nationwide, yet they make up the largest segment of the U.S. workforce. As the “Zoom town” trend took off during the Covid-19 pandemic, many city dwellers were able to move to the suburbs to take advantage of more space for less money. As people began to realize the benefits of working from home, it only made sense that they would move to bigger apartments, houses, etc. With more space, they could have room for a home office or even a gym—removing the need to pay any membership fees.
With cost savings on the line, this created a massive shift in the urban real estate market. Suddenly, people didn’t want to stay in the city anymore. The appeal of the city’s bright lights started to fade when people realized they could have all the same amenities for less in the suburbs.
And, ultimately, this led to a mass exodus on the commercial real estate side, too.
Employers Take Advantage Of The Suburban Market
Quite frankly, it makes a lot of sense to want to be where your workforce is. After seeing employees get themselves settled in suburban neighborhoods, employers started to follow suit. Vacating city office buildings and skyscrapers for neighborhood office parks proved to be more cost-efficient. Plus, employees get to enjoy an easier commute with less traffic and free parking.
And while people may be moving to the suburbs for more space, it’s likely that employers are moving to smaller offices as a means to save money. Even major companies like Google are implementing desk-sharing policies as a means to maximize space.
With more firms offering employees the option to work entirely from home or to adopt a hybrid schedule, the need for a lot of space simply isn’t paramount anymore. Instead of every employee needing their own individual desk, employees can create a schedule—with groups coming in on opposite days—and share the same desks.
In fact, some companies with long-term city leases are even looking for ways to sublease their office space—allowing them to move out of the city without losing money on their current lease.
The Fate Of Urban Commercial Real Estate
So what does this all mean for urban commercial real estate? Well, for current investors it can be tough to know when to sell and for how long to hold. However, markets and trends fluctuate all the time. I believe it may be your best bet to hold onto the property and see how the economy behaves over the next few months and years.
J.P. Morgan recently published their midyear CRE outlook report and shared some interesting findings. Among these findings are that multifamily, industrial and neighborhood retail are continuing to maintain strong performance. However, office buildings with less than 10-year leases may struggle to weather any economic fluctuations.
Repurposing
But there are always unique opportunities to repurpose an existing property. Trends show that the supply of affordable housing is unable to keep up with the demand. In fact, the National Low Income Housing Coalition (NLIHC) states that no state nationwide has enough low-income housing. The U.S. is short a whopping 7.3 million rental homes that are both affordable and accessible to individuals with low incomes. Commercial real estate investors may be able to pivot their strategy to make better use of their spaces while also helping lower-income families.
Using Proptech
Not to mention that technological advancements continue to help CRE investors. Those who use property technology (proptech) can likely improve operational effectiveness and therefore cut costs. This also includes rent payment portals. Instead of remembering to send invoices and payment reminders, CRE investors can use an automated system with multiple payment methods so residents can pay how they prefer.
For newer investors, the shift away from commercial urban properties could be a great long-term investment. As office buildings continue to drop in value, investing now may reap major rewards in the future. Any good real estate strategy always starts with buying when prices are low and selling when the property has appreciated in value.
Of course, there are always going to be risks, unforeseen challenges and economic shifts. However, as I’ve said before, there is one thing we can’t make more of—and that’s land. Your plans may change over time, but I believe if you’ve invested in land you’ll always have something of incredible value.
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