Is It Structural or Cyclical? Residential 2020 Real Estate Trends Amid COVID-19

Whenever I speak to other real estate investors, the conversation always turns to how best to take advantage of real estate industry trends and discussions about experts’ corresponding predictions for 2020. Among other things, COVID-19 can be understood as a massive behavioral modifier. When looking at 2020 real estate trends, there’s ample evidence that people are making different decisions than they were pre-pandemic. When money is on the line, it’s important to remember that there are two kinds of trends that arise in a crisis.
cyclical real estate market
A cyclical trend is a kind of symptomatic expression that’s expected to resolve itself, a swing of the COVID-19 pendulum—or a co-existing phenomenon—due to return to an inevitable center position that more or less resembles its pre-pandemic state.

Conversely, a structural trend indicates a kind of permanency that will permanently change the trajectory of any real estate trend. It happens when forces converge to cause a different course of action make more sense in the long run. In this case, real behavioral change is taking place, change that will have lasting market influence.

As an active real estate investor myself, and as someone who’s interested in the larger conversation as it shifts, it’s my top priority to identify how the coronavirus is affecting trends in the real estate market and try to place them in their rightful categories.

Real Estate 2020: Seeking Shelter—A Major Modification

Of the behaviors modified by COVID-19, a most important area of focus for our purposes is the decisions people make regarding where to seek their shelter. Let’s use New York’s market sector to exemplify some of the already evident changes:

An August report by UBS, COVID-19 and Residential Real Estate, confirms that home sales activity has increased in the state’s suburbs. It goes on to acknowledge that the shortage of homes for sale outside of the city’s center has created bidding wars, inflating the value of the suburb market sector.

 

Cycles At Play

First, let’s identify the cyclical forces at play. Under normal circumstances, a preference for city center proximity relies on the draw of crucial city-specific offerings: cultural events, sporting venues, diverse dining, city events, employment and schooling opportunities.

With most, if not all, items on that list deemed inaccessible by COVID-19, a loss of city affinity is to be expected. But there are no concrete reasons supporting a permanent disinterest in city events, or a long term turning away from diverse dining, which is to say we have every reason to expect a post-COVID return to safe activity to re-ignite the draw to city living in these predictable ways.
Structural vs Cyclical Chart

Another cyclical trend exists that requires looking through a larger lens. In their August report, UBS includes a chart highlighting the trends of available rental homes in the US, dividing interest into two categories: inside metropolitan statistical areas (MSAs) and outside MSAs.

Over the past several quarters, there’s been a significant decline in the availability of homes for rent inside MSAs. At least part of the turn toward suburb rentals can be explained as a downstream effect of this lack of availability.

That is to say that part of this mass exodus can be explained by a cyclical trend (lack of rental property availability) completely unrelated to the COVID-19 modifier.

Last, it’s worth noting that at least part of the move toward the suburbs is coming from city dwellers who are fortunate enough to also have properties in the suburbs. In those cases, a shift in residence is temporary and more likely to be reversed. UBS believes strongly that upon the availability of a vaccine, the elimination of social distancing mandates, and the safe return to normal activity, large cities will see a substantial return of residents.

Evidence of Structural Shifts and Long-Term Commercial Real Estate Trends

While many things remain in flux, it’s safe to say that the gravity of this global pandemic will leave behind some permanent changes. On that list, an important item of consideration is the evolution of office space and long-term commercial real estate trends. In an earlier report, UBS took housing infrastructure in the suburbsthe position that the US office real estate market is far from dead. Still, it’s likely that a number of companies will phase in to the use of office space, and make remote working a more permanent part of their routines.

If more people are unattached from a physical office, permanent trends in the market are sure to arise. Some employees will choose to work remotely full time, and position themselves in suburban locations, especially in cities like New York and San Francisco where living costs are particularly high.

Furthermore, many residential areas have more favorable living conditions when it comes to cost of living, taxes, and business regulation. For small businesses trying to recover from the economic turmoil, the offerings of such areas are all the more important. This could cause the interstate migration (a structural trend already underway) to pick up pace.

Real Estate Forecast 2020: Short-Term Flips and Long-Term Holds

Every real estate investor needs to determine for themselves whether something is a short-term adjustment or a long-term shift. Any 2020 real estate predictions that I might make look at these two types of real estate market trends and make decisions that conform based on whether they are cyclical or structural.

Amid the backdrop of the COVID-induced urban exodus, someone who wants to flip distressed property in the currently-more-desirable suburbs probably has a more immediate window for strong profits, while the long-term investor can scoop up some city bargains that may not see immediate appreciation but will probably do very well when viewed on a longer time horizon.

If there’s anything I’ve learned from my real estate investments, it’s that there are almost always additional factors to take into consideration. Every market is unique, and timing is a vital factor in every sale. For that reason, and because this is a story of particular importance, I’ll continue to dig into the data and follow the market closely—I hope you’ll continue to join me.