investor notes
Key Events that Shaped Real Estate Today
As experienced investors ourselves, we’ve come to understand a fundamental truth: change in our industry is bound to happen. You see, investing has its highs and lows. A change in one market can impact another, so it’s crucial to understand the dynamics of the investment you’re involved in.In this article, we’ll talk about the significant trends and changes that have played a pivotal role in shaping real estate investing as we know it today.
The Dot-Com Bubble Bursts, Shifting Focus to Real Estate (2001):
The late 1990s saw hype around internet and technology stocks, with investors pouring money into dot-com companies often without concern for traditional value measures. By 2000, however, the dot-com bubble began to burst as many of these companies failed to deliver profits. Stock prices plunged, leading to massive losses for investors in tech stocks and an erosion of confidence in the broader stock market. The 2001 implosion of the dot-com bubble caused investment to shift away from risky internet ventures toward seemingly more stable assets like real estate.
The Subprime Mortgage Crisis and the Great Recession (2007-2009):
This crisis was a wake-up call for new and inexperienced investors and served as an important reminder that all investments carry risks. It emphasized the importance of caution, spreading investments across different assets, and having a solid grasp of investing, regardless of the type of investment you’re involved in.
It was triggered by the issuance of high-risk mortgages to borrowers with limited creditworthiness. More underlying factors amplified the impact of subprime mortgages including but not limited to transparency, the complexity of mortgages, securitization, unchecked regulations, and more. As a result, a wave of foreclosures surged, and the nation was in a state of panic and uncertainty. We know it today as the Great Recession.
With the housing bubble burst and single-family homes suffering precipitous drops in value, many investors pivoted to multifamily properties as a more stable asset class. The economic downturn led to an increase in demand for rental properties as many people faced difficulties obtaining mortgages or were hesitant to buy homes in an unstable market.
The Recovery (2010-2015):
From 2010 to 2015, something interesting happened. After a big problem with houses and money in 2007-2008, the real estate market got better. Several factors helped: tightening of lending standards, urbanization that increased employment rates, low mortgage rates, and so on. Overall, the recovery was seen in almost every area of real estate.
The national median home price had increased by approximately 25% from its lowest point in 2012. The recovery was not limited to residential real estate. Commercial real estate also rebounded, with vacancy rates decreasing and rent prices increasing in many markets.
We also saw housing preferences behavioral change primarily in the age group of 25 to 34-year-olds, which includes many millennials. This group was drawn to the convenience of amenities offered by multifamily living. Another factor that drove this change was the tightened mortgage standards prompting many to rent over homeownership.
Technological Disruption and Commerical Real Estate (2015-2020):
Between 2015 and 2020, the commercial real estate landscape underwent significant transformations driven by technological advancements and evolving tenant demands. Innovations like coworking spaces introduced flexible leasing approaches that posed challenges to traditional office setups. Property technology solutions improved building operations and tenant experiences.
The onset of the pandemic in 2019 brought about a seismic shift in the real estate industry, particularly impacting the commercial sector. The surge in e-commerce led to increased demand for industrial warehouses, particularly for last-mile delivery. Trends such as smart buildings and sustainability became crucial factors in investment decisions. Retail faced disruptions from online shopping but also adapted by repurposing spaces for new uses.
The rapid transition to remote work accelerated changes in office layouts and leasing models. Urbanization drove the development of mixed-use properties that combined residential, work, and leisure spaces. The growth of cloud computing led to heightened investment in data centers. Regulatory changes also played a role in shaping real estate markets.
The pandemic expedited the adoption of remote leasing and virtual tours as the industry adjusted to these significant trends. These disruptive forces compelled commercial real estate to adapt to new technologies and align with evolving tenant preferences.
Present (2021-2023)
In 2020 and 2021, we enjoyed low interest rates. However, because of inflation, the Fed raised rates dramatically from mid 2022 through 2023. Right now, in the United States, investors are taking their time before making new investments. The market is not as fast as before.
We think fewer people will buy homes soon. Redfin thinks the same. They say high mortgage rates, rising prices, and a not-so-great economy will make it harder for people to buy homes.
Around July and August 2023, we noticed higher vacancies although they remain relatively low from a historical perspective. While the economic downturn of 2023 may lead to temporary upticks in vacancies, the enduring demand for rental properties often remains robust, particularly if economic challenges make home buying less attainable.
How We’re Dealing with This Change?
In times of market instability, having the right partners with strategic expertise is key. Their seasoned understanding helps navigate through the market’s natural ups and downs, guiding your investments towards favorable results.
In monitoring our properties, we’ve noted temporary upticks in vacancies. However, these challenges have been efficiently tackled and resolved using carefully crafted strategies.