Since the onset of the ongoing pandemic, we’ve all had to come to grips with a new way of living and a new acronym – WFH, or “work from home.” The trendlines are startling. The impact has spread across the real estate sector and can be seen in everything from struggling mall properties to booming second home sales. Some of these changes may be temporary but others are likely to be around even after the introduction of an effective vaccine and a return to something approaching normalcy.
A June report from Stanford University found that about 42% of the U.S. labor force was working from home at that time, accounting for more than two-thirds of U.S. economic activity. A separate study run jointly by Stanford, the University of Chicago, and the Atlanta Federal Reserve reported that even in a post-COVID environment, firms expect work-at-home days to grow by a factor of four compared to pre-COVID levels, from five to 20 percent, a significant shift. Additionally, a Morningstar report anticipates a post-COVID increase in WFH at about 13% of the workforce by 2025.
What does this seismic shift mean for real estate and investors in real estate investment trusts (REITs)? First, there is likely to be a further dispersion of returns across property types and geographies. The winners in this will be those properties that support WFH, or that house services that can’t be effectively delivered remotely, among others. This includes industrial facilities – think Amazon distribution centers, for example – data centers supporting remote access and cloud-based work, and medical office properties.
The winners in this will be those properties that support WFH, or that house services that can’t be effectively delivered remotely, among others.
There has been a simultaneous shift towards consolidation at the hospital level and the distribution of some specialty practice areas like urgent care and so-called “doc-in-a-box” facilities, which can be standalone or part of a mall. While we do expect to see an expansion of telemedicine (supportive of the data center thesis) not all medical services can be delivered remotely. There will still be a need for office visits, and therefore medical offices.
Another growing sector: single-family houses, which should benefit from a trend towards renting instead of owning and the migration out of urban centers and towards less densely populated regions. In a related trend, the U.S. Census bureau has noted that by 2030 all Baby Boomers will be 65 years old or older, and that one in five Americans will be at retirement age. That, too, has significant implications for the type of housing stock that will be needed, requiring more elder care facilities and lifestyle developments targeted to this demographic.
Finally, infrastructure will become even more important. The move to WFH has uncovered a number of weaknesses in the “plumbing” required to support a distributed workforce – everything from cell towers to fiber optic cables. This all touches on real estate in some way and may create opportunities. We expect to see more investment here.
An area where we anticipate protracted weakness is in office properties. Every employee who works from home is one more person not requiring full-time office space. Even part-time WFH will likely reduce office demand. New York City is the country’s largest office market and, while it may not be completely representative, it’s a reasonable proxy for the impact of the pandemic. A recent study from Cushman & Wakefield found that office vacancies in the city stood at more than 13%, a 24-year high, with supply at about 54 million square feet. Those numbers will likely go down as workers return, but it may take years to fully absorb all this inventory. The report noted that new leasing amounted to just 2.5 million square feet in the third quarter of this year compared to a quarterly average of 8.7 million square feet in 2019.
This seems likely to improve over time; there are still advantages to gathering in an office and in a central business district. And, as many are discovering, WFH is not for everyone. But office demand is unlikely to return to pre-pandemic levels in the near future, as both the Morningstar and Stanford studies suggest. This doesn’t rule out the office sector as an investment, but it does mean being selective in picking markets and properties.
A second property type likely to see long-term disruption is retail, and especially mall properties, as the already powerful move to online shopping continues to gain speed during the pandemic. This would appear to be a secular, rather than a cyclical change, supported by greater convenience and shifting preferences, among other factors.
Looking broadly at real estate, the picture is generally bright. We see an asset class that has certainly been disrupted but isn’t going away, and one that can continue to play an important role in a portfolio, generating income and providing a source of diversification. WFH and the pandemic have shifted the landscape for real estate investors in multiple ways but they haven’t invalidated the basic investing premise. For those who have shied away, it may be worth a fresh look. IQ US Real Estate Small Cap ETF (ROOF)
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