Many industry experts predict that Commercial Real Estate (CRE) stands to suffer as much from the outfall of the COVID–19 pandemic as almost any other industry in the country. Just consider the retail and hospitality sectors. Stores are shuttered. Restaurants closed. Conventions are cancelled and travel has all but disappeared. These segments of CRE play a large and important role in our economy, and until we can get so many of our displaced and unemployed workers back to work, the outlook isn’t favorable.
But with any challenge, opportunities are often present. There are areas of CRE that are better positioned than others to weather this storm and, in fact, there are some commercial real estate sectors which may perform quite well. So, for investors considering the sale of an investment property using a 1031 exchange, Delaware Statutory Trusts (DSTs) that hold certain types of property may prove to be timely and opportunistic investments in this most unsettled time. Here are a few worth considering.
With an estimated 17 million workers filing for unemployment benefits as of April 11, 2020 and with nearly one-third of U.S. families identified as ‘renters’, you might think the multifamily (apartment) sector of CRE would be an area for investors to avoid in this recession. But housing is a necessity of life and the provisions in the CARE stimulus package are clearly designed to keep people employed and capable of making their mortgage and rent payments.
Multifamily has been a strong performing asset class in recent years and because of the essential nature of this type of real estate (it is not discretionary), it is positioned to out-perform other types of commercial real estate such as retail and hospitality. Our population in the U.S. continues to grow and with many millennials still showing preference towards renting vs. home ownership, per CBRE Economic Advisors, multifamily is projected to begin a rebound in Q4 2020.
Industrial and Storage
This sector stands to benefit from the coronavirus pandemic as demand for warehouses continues to grow in response to the massive disruption in consumer supply chains. Retailers who’ve closed brick and mortar stores need space to fulfill the needs of online customer orders and to stock inventories of goods displaced from retail stores and to stage inventory arriving from suppliers around the world.
Industrial CRE is expected to see particularly strong growth for warehouse space that is temperature controlled. As consumers utilize online ordering for groceries and other perishable products and as producers move to store products closer to consumers and avoid in-store shortages, this specific segment of the industry could prove to be one of the best opportunities for investors. The CBRE Group estimates there will be a need for 75 million to 100 million square feet of additional industrial freezer and cooler space over the next five years.
No asset class is immune to the impact of the current pandemic and investors must be especially cautious in evaluating and selecting specific opportunities even within relatively better positioned property types. As always, investors are wise to perform extensive due diligence prior to investing and employ appropriate risk mitigation strategies such as asset allocations across multiple properties when possible.
We encourage you to contact us if you are considering a 1031 exchange or if you’d like more insight on real estate investing during this very challenging time. We will get through this, and as mentioned before, investment opportunities do exist today that may be worth your consideration.
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