Real estate markets, both commercial and residential, will look different after COVID-19. Demographics will play a role in this, but the most sensational reports are overstated.
In the post-COVID world, we’ve heard grandiose reports of permanent remote work and the decline of city living. But are these predictions colored by recency bias?
Digging into some of the trends, we think there will be profound changes in real estate after COVID. But underlying fundamentals suggest some things may look more normal than we expect.
What’s the real estate market look like today?
The post-pandemic residential housing market in the U.S. is hot. Driven by low interest rates and limited housing supply due to virus concerns, buyer demand far outstrips housing inventory. This pushes up prices.
Metro areas across the U.S. saw price inflation after economies reopened. From the number of mortgage applications to prices, sales volume, and average time to sell, all signs point to a frothy market.
The primary outliers appear to be markets in dense urban cores, especially the costliest cities such as San Francisco and New York. In these markets, demand and prices are dropping as residents flee in search of space. A range of data confirm an exodus from these densely populated spots. How permanent is the trend?
Read more: Cheapest Cities With the Most Space
What are some of the biggest trends?
Since the start of the COVID-19 pandemic, a number of headline-grabbing trends affected real estate.
Millions of employees shifted to remote work. Demand for more outdoor space and home offices skyrocketed. Meanwhile, the sudden explosion in investment in secondary and rural markets drove a disproportionate rise in property values compared to big cities.
These trends make sense. Everyone whose job allows them to work from home started rethinking space during the pandemic. Staring at the same walls for hours every day will do that.
Based on real estate listing site data, residents happily traded one bedroom apartments for two bedrooms to add office space. They exchanged condos for single family homes.
What will happen next?
However, many of these trends are a temporary overreaction. Rural area price appreciation reflects situational demand, which is not sustainable. As with any other shock to the system, there is a knee jerk reaction to the shock.
Some homebuyers may be emphasizing short-term needs. The fear and uncertainty of recent events has many thinking of survival today and less about the fact that COVID-19 won’t last forever. In fact, real estate after covid may not be so different than it was before.
It’s true that the pandemic forced both employers and employees to prove they could go fully remote in a very short period of time. And companies love the savings from not paying for office space. But whether this transition is sustainable in the long-term is still unknown.
We’ve all been busy dealing with the virus. Society has its hands full figuring out how to stay safe, homeschool children, and remain financially afloat. We didn’t have the time yet to run efficiency and utilization studies for workers across time zones, or analyze turnover rates for newly hired remote employees who are having a hard time forming emotional ties to the company.
Thinking that everybody can go remote 100% of the time is premature.
Trends to keep an eye on
On the flip side of the coin, after tasting the flexibility of working from home, not everyone wants to go back to the office full time. Employers will be hesitant to put hundreds of workers together in concentrated places for extended periods of time. These underlying forces are likely to have the following impact on real estate after COVID:
- Younger millennials and Gen Zers will return to the vibrant urban scene once demand for convenience and culture comes back. Even in the middle of the pandemic, 45% of millennials and 49% of Gen Zers prefer living in urban areas. (See image below.)
- Move up buyers like older millennials and Gen Xers will continue to absorb larger suburban properties, helping price appreciation within the asset class outpace urban and rural.
- There is a chance that rural prices will see a correction once the dust settles and buyer’s remorse kicks in. In the current environment, conveniences like quick access to schools and doctors and stores are moot. But that will change.
- For Gen Xers and older millennials suburban areas remain a perfect life-work balance because they’re the middle ground between rural and urban. Working part-time remote across the board will improve traffic, too, so that will be less of a concern.
Polina is Sundae’s Sr. Director of Research and Lead Economist. She has more than 15 years of valuation experience across commercial and residential real estate. Her background includes stints with Cushman & Wakefield, Hanley Wood, and Standard & Poor’s. Polina graduated with a double major in Economics and International Relations from the University of California at Davis and has been a CAIA Charter Holder since 2010.