Turning Crisis Into Opportunity
By Kendra Todd
Over the past 17 years, I’ve had some profound professional experiences I could have never imagined…
After duking it out against wildly talented entrepreneurs and hearing the words You’re Hired! on Season 3 of NBC’s The Apprentice… to working with Donald Trump on his record-breaking $95 million sale of a Palm Beach oceanfront estate… to surviving and learning to thrive in the midst of the largest U.S. housing crash in our nation’s history… I thought I’d ridden just about every big roller coaster there is.
Then came 2020…
No one could have predicted a global pandemic that caused entire nations to shut down, resulting in widespread economic fallout. It’s during unprecedented economic times such as these that we are reminded, usually without warning, that what goes up must come down.
It was a tough pill to swallow for those heavily invested in the stock market when global economies shut down for the first time in modern history… And on March 12, markets plummeted in what’s now being dubbed the new Black Thursday. The U.S. particularly suffered, experiencing the greatest single-day percentage fall since the 1987 stock market crash.
When stocks drop and a recession seems imminent, people assume that the housing market will crash as well, but in fact, the opposite is typically true.
When stocks drop and a recession seems imminent, people assume that the housing market will crash as well, but in fact, the opposite is typically true. It might seem counter-intuitive, but recessions aren’t historically a bad omen for the housing market.
A leading real estate data provider looked at home prices since 1980 and discovered that during three out of the last five recessions, home prices actually increased. In 1990, during one of the two recessions where home prices declined, it was only by less than 1%.
The reason is quite simple – housing is a commodity. Regardless of the economic conditions, everyone needs a place to live…
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Real Estate Is Thriving in Spite of the Times
Despite the current economic turmoil, the real estate market has been surprisingly robust, and bidding wars have been more common than not as inventory remains low and homebuyer demand has shot up. Redfin estimates that 53.7% of all its offers written in June experienced bidding wars.
Here in Seattle, bidding wars are the norm… not the exception. I regularly see homes with 10 or more offers. And just this month, I listed a home that had more than 100 showings in less than a week!
Regardless of the current economic uncertainty, buyers are more willing than ever to take risks to win homes… According to Redfin, in June 20% of all winning bidders in multiple offers waived the home-inspection contingency. And Zillow’s July data indicates homes continue to sell at their fastest pace in two years, only staying on the market for an average of 20 days before going under contract.
At the same time, mortgage rates continue to drop. The average 30-year fixed-rate mortgage fell to 3.03%, the lowest rate since Freddie Mac began tracking the statistic in 1971.
Low housing inventory and high consumer demand fueled by record-low interest rates have kept the housing market moving forward at a strong pace over the past few months.
The richest men and women in the world have made their fortunes in various ways, but there is one common theme for many of them… real estate was a core focal point of their investment strategy. As a matter of fact, of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3-to-1.
The often-touted Warren Buffett adage couldn’t be more true right now… “Be fearful when others are greedy. Be greedy when others are fearful.” In the midst of the current economic turmoil, certain types of real estate have emerged as attractive prospects, and opportunistic investors are taking advantage by smartly investing in the right assets, at the right time, in the right places.
Identify Recession-Resistant Housing Markets
One of the main principles of real estate is that there really is no such thing as a national housing market. Real estate is, and will always be, intrinsically local. Some housing markets will get hit hard by the COVID-19-induced economic shutdown, while others will continue to thrive as if the shutdown never happened.
Real estate is, and will always be, intrinsically local. Some housing markets will get hit hard by the COVID-19-induced economic shutdown, while others will continue to thrive as if the shutdown never happened.
Not surprisingly, many of the states with the highest appreciating real estate markets over the past year have a few things in common – low or no state income tax, high-paying jobs, good quality of life, and high net migration that has outpaced housing supply.
For example, Florida has no state income tax, has enjoyed home-price appreciation above the national average of 6% over the last year, and has the highest net domestic migration and net international migration of any state in the nation. This translates into a strong demand for housing.
Another great example is my current hometown of Seattle. Washington is one of only seven states in the U.S. that doesn’t levy a personal income tax. The Seattle area in particular has a booming local economy fueled largely by the corporate growth of Amazon and a steady influx of tech-related companies attracted to the area by the strong talent pool and lower cost of living than Silicon Valley. In the last 10 years, the Seattle real estate market appreciated a staggering 80.83%.
To invest successfully in real estate, you must focus on the underlying value and consider whether 10 years from now it’s an investment that you’ll be happy to have. I would wager that those who purchased in Seattle 10 years ago are quite pleased with their return on investment today…
So how do you identify the right markets to invest in for the next decade? The simplest way is to understand migration patterns and why they are occurring.
The Suburbia Movement
One crucial trend to follow is the move to the suburbs, spurred largely by the work-from-home movement, with a boost from people fleeing major cities overcome by violent protestors, crimes waves, and defund-the-police movements.
As working remotely becomes the new norm for many, it empowers workers to choose where they want to live.
As businesses discover that they can successfully maintain a remote workforce and slash costs by eliminating physical office space, we are witnessing a fundamental change in how many businesses operate moving forward. As working remotely becomes the new norm for many, it empowers workers to choose where they want to live, instead of being anchored to their company’s physical location.
Facebook founder Mark Zuckerberg recently offered his employees the opportunity to work remotely on a permanent basis, and expects half of Facebook’s workforce to transition to remote work over the next five to 10 years.
The option to work remotely will likely spur a housing boom in suburbs and smaller, more affordable cities…
A recent survey by Zillow found that 75% of those surveyed who are working from home due to COVID-19 would prefer to continue, so about half the time if their employer gives them the option after the shutdown ends.
The recent wave of riots and increased crime in big cities has been the last straw for many residents already frustrated by rising crime, rising taxes, and growing homeless encampments creeping into cities they once loved. In the two weeks after unrest began in Minneapolis and the city council vowed to abolish its police force, the number of homes listed for sale on Zillow rose a staggering 22% and apartment vacancies rose 43%.
The pandemic and protests in New York City have also spurred a new exodus off the island. A real estate boom has begun on Long Island and suburbs north of the city where competition is fierce and buyers are snapping up homes in bidding wars often sight-unseen from virtual tours.
This trend to suburbia will be a big win for warm, sunny states with affordable housing, lower crime and lower taxes that will likely see an influx of educated, high-paid workers. States with higher costs of living and higher taxes will need to make big changes to slow the out-of-state exodus. The biggest loser? Predictably, California.
Identify Recession-Resistant Investments
Identifying the right areas to invest in is the first step. The second is to determine what type of real estate will best weather a recession and yield you the greatest returns over the long term.
Industrial Warehouses
COVID-19 has sparked fresh interest in industrial warehouses. Investors have discovered that most industrial tenants are in what’s deemed “essential service” industries and have not only continued to pay rent during the shutdown, but many have expanded their need for warehouse space.
For example, according to refrigerated-warehouse companies and online grocers, the increased demand for home delivery or in-store pick-up of groceries has created an additional need for 75 million to 100 million square feet of freezer/cooler space.
Data centers, which were already a leading tenant profile in the warehouse market, have also grown in demand as data usage has increased and more people work from home. Multitenant data-center operators, for example, experienced 52-week highs through COVID-19, further cementing their place as a top-tier warehouse tenant.
As a result, warehouses are now considered by many to be an investment safe-haven from the COVID-19 impact. Investors who own them, whether privately or through shares in real estate investment trusts (REITs) or crowdfunding investments, will likely see short-term increases in returns, values, and/or dividends while demand is high.
The question is simply whether this trend is a short-term response to today’s economic condition or a long-term trend that’s here to stay… If the recent consumer behavioral changes and work-from-home movement become permanent developments, there could be big opportunities for real estate investors in this sector.
Self-Storage
While self-storage facilities haven’t necessarily benefited from the current pandemic, they are one of the least affected commercial investments. Over the past several months, they have seen little to no change in occupancy or delinquency. This is not altogether surprising. In fact, self-storage REITs were the only real estate asset type that produced positive returns during the 2008 housing-market-fueled recession.
As this crisis continues and record unemployment prevails, many households will consolidate and need a place to store their belongings. Furthermore, many small businesses impacted by the shutdown will be forced to downsize or move and will need to store equipment and inventory while they get back on solid ground.
Both short-term and long-term trends for self-storage look favorable. Currently, 90% of all self-storage facilities in the U.S. are consistently occupied. It’s also estimated that one out of every three households in the U.S. will utilize self-storage at some point in the near future.
Multifamily Housing
Cracks are starting to show in U.S. multifamily markets as furloughed and unemployed tenants struggle to pay rent. This will likely lead to some short-term opportunities to acquire multifamily properties at good values from struggling landlords.
Regardless of the short-term struggles facing multifamily housing, the long-term outlook remains positive. Rental demand is likely to remain strong in the future, making multifamily housing a continually attractive investment.
According to a new report from RentCafe, 43% of renters who had been preparing to buy a home have now changed their plans due to COVID-19. And 23% of the renters surveyed for the report said that they now believe they will never buy a home. For millennials in particular, renting appears to remain the lifestyle of choice for the foreseeable future.
Take Advantage of Struggling Real Estate Sectors
The big real estate loser over the short term is inarguably commercial retail. Retailers have been battered by the pandemic, and many have shuttered their doors permanently and filed for bankruptcy.
Pier 1 Imports is going out of business. And in April, Gap announced it was no longer able to pay rent at its North American locations, which amounts to a rental loss totaling $115 million per month. Not to mention the countless small businesses who have closed for good, leaving mom-and-pop retail landlords stuck with record-high vacancies and no prospects for new tenants.
Those opportunistic investors who have a high-risk threshold might find some great deals in the retail sector, but over the long term, as more and more businesses transition to online operations, the jury is still out as to whether retail properties will ever recover all the value they’ve lost.
People will always need a place to live… When invested in wisely, real estate generates year-round income, appreciates over time, provides attractive tax breaks, and is a bankable asset you can leverage to grow your portfolio.
There’s also the added bonus that market shifts are usually predictable at least six months out, so you can plan entry and exit strategies with ample warning. It’s an incredible asset class that will help you build a legacy of passive income for future generations of your family over time. As esteemed real estate investor Louis Glickman said, “The best investment on Earth is Earth.”
Kendra Todd is a nationally recognized real estate expert, TV personality, author, and motivational speaker. She was the first woman, as well as the youngest competitor, to win Donald Trump’s popular NBC show The Apprentice.
Kendra hosted the critically acclaimed HGTV series My House Is Worth What? and is co-founder of The Kendra Todd Group, a real estate company based in Seattle, WA. She was also named of the Top 30 Realtors Under 30 in the nation by the National Association of Realtors.
Kendra also wrote the best-selling book Risk & Grow Rich: How To Make Millions in Real Estate.
