There are exceptions to every rule, but while hotel, office and retail continue to endure tough times and face uncertain futures, residential has – as a rule – recovered from the shock of covid-19 and begun to look ahead with optimism. The sector’s strength can be attributed to a few factors, but prime among them is the simple fact that shelter will never go out of style.
Consumers may shun the mall or high street for the online marketplace, and working patterns can change overnight, but people will always need somewhere to live. Residential real estate is already bouncing back as the sector continues to demonstrate its resilience and adaptability.
Residential is resilient
Residential real estate remains robust and investors appreciate its strengths. Fundraising rebounded at the start of this year, enjoying the strongest opening quarter in five years.
Closed-end private real estate specifically targeting the sector attracted $3.9 billion in Q1 2021, the most in the first quarter of any year since 2016, according to PERE data. The Q1 2020 total had been only $2.1 billion. The strongest quarter last year was Q4, at $2.3 billion.
While fundraising is ramping up, Real Capital Analytics data show six of the 10 largest global apartment markets in 2020 recorded an increase in activity compared with the year before. Market participants know that residential real estate can be relied upon.
Take US multifamily. NCREIF data show that there has not been a single 10-year holding period over the past 40 years where multifamily returns have gone below 6 percent.
The sector is tried and tested. The key factors that have underpinned past performance remain in place. In fact, the chronic undersupply of housing which has buoyed multifamily has, if anything, become more acute.
With the government-sponsored Fannie Mae and Freddie Mac providing “trillions of dollars of financing for the housing market,” Greg Pinkalla, chairman and chief executive, Fairfield, notes the market is able to remain competitive even during deep recessions. “Multifamily has had strong tailwinds since the global financial crisis that will continue to drive solid performance through the next decade,” he says.
Speaking specifically about Japanese multifamily, Louise Kavanagh, chief investment officer and head of funds management, Nuveen Real Estate in APAC, says: “The resilience of the sector has been proven through many different market cycles, whether the currency crisis, the global financial crisis or covid.”
This resilience has been seen elsewhere in residential real estate, even for example in co-living, which may at first seem surprising, putting strangers into such close proximity as it does. In fairness, the early days of the pandemic did hit the sub-sector hard, before the rebound promptly followed.
“ Multifamily has had strong tailwinds since the global financial crisis that will continue to drive solid performance through the next decade”
“There was a pretty immediate shock to occupancy, which fell from mid-90s down to the 80s. However, from the third quarter onwards occupancy started to recover and we are now at full occupancy,” says Jon Dishotsky, co-founder and chief executive of Starcity, a San Francisco-based co-living operator with facilities in the US and Europe.
Resilience has also been seen in student housing. CBRE figures show investment volumes for European purpose-built student accommodation surpassed €9 billion in 2020, exceeding the previous year’s total.
“Student accommodation provides stable, recurring, high-margin revenue streams, and has done so even through the pandemic,” says Zachary Vaughan, managing partner, Brookfield Asset Management. “In the UK, Germany and the Netherlands, occupancy held up strongly,” notes his colleague, senior vice-president Jeannie Wong.
With residential performing well and other sectors struggling, it is no surprise that interest is high. Residential is tough enough to be relied on.
“We have seen overall residential prices rise about 10 percent in the past 12 months in the US, albeit with quite a lot of regional variation. UK prices have risen around 9 percent, though only 3 percent in London, with Germany rising 11 percent and Australia up 6 percent,” says Rod Cornish, head of real estate strategy, Macquarie Asset Management.
Residential is adaptable
A theme that comes up time and again when discussing the impact of covid-19 on residential real estate is that the coronavirus has accelerated changes that were already taking place in the sector. This includes greater demand for amenities, ESG and digital solutions.
It also includes an investor preference to partner with specialist full-service platforms which can develop, own and operate units at scale, says Dana Gibson, co-head of real estate in Europe, Macquarie Asset Management. This is a global trend which is picking up steam.
Gibson adds: “We believe demand from investors will support the creation and growth of specialist groups, particularly as investors seek enhanced data transparency and tech-enabled management systems.”
Facilitating easier communication between tenants and landlords has certainly been a priority. While this was gaining importance before covid, it has become even more highly prized in the pandemic.
“We have seen overall residential prices rise about 10 percent in the past 12 months in the US, albeit with quite a lot of regional variation”
Macquarie Asset Management
However, Mahdi Mokrane, head of investment strategy and research, Patrizia adds: “The digital push is not just about communication, but also about how our residential buildings can help sustain and increase the health and wellbeing of our tenants with better air quality systems, more bicycle racks, gardens that tenants can tend to, bookable DIY facilities and on-demand electric vehicles, for example.”
He notes his firm has seen amenities such as balconies go from “nice-to-have” to “must-have.” There is also a shift to more generous space and co-working spaces.
Residential is evolving
Another shift is the greater thought now given to ESG. Institutions are demanding better exposure to ESG-focused strategies and governments are looking to residential real estate to help meet net zero ambitions.
Jai Patel, managing director, Intermediate Capital Group, points to ‘the Greta Thunberg effect,’ saying: “We are finally seeing strong momentum on decarbonization in our sector.”
Investors are also turning to residential real estate assets to help to meet their ESG goals. “Impact investing in real estate is increasing. It is the biggest growth area when you look at the total impact investment universe,” says Philip Hirst, director, JLL. “When you think about the most impactful forms of real estate, housing tends to come top of the list. Not only because everyone needs a roof over their head, but also because most developed economies have some form of housing crisis.”
Social housing, in particular, has been pushed up the agenda by covid-19. “All our investors now want to be part of the solution, and they see that they can do more than just make a return,” says Tanja Volksheimer, senior portfolio manager, Nuveen Real Estate.
Apartment design will have to change to accommodate the fact that much housing stock lacks the facilities needed for working from home, argues Macquarie’s Cornish. There will be greater need for workspaces in the apartment or in the building, for example. “The need for green space, whether within the property or nearby, is important and ties in with a growing focus on the wellness of residents,” he adds.
Covid lockdowns forced many people to work from home and a large proportion are likely to continue to do so – to some extent – once the virus has cleared. This has not only affected what tenants want from their homes, but also where they want those homes to be.
“Tenant demand for multifamily in the US has evolved during covid-19,” says John German, managing director – residential investments, Invesco Real Estate. “In particular, there is increased demand in suburban markets. As some tenants can work remotely and do not need proximity to the office at present, they are seeking more space for less cost.”
How that picture changes after covid remains to be seen, but Patel, for one, is confident that suburban property will remain attractive.
“Employees by and large will not be required to be in the office five days a week going forward. Would you prefer to live in a two-bed apartment in Zone 2 London, or a four-bed house with a garden in Zone 6 going into the office twice a week?” he asks.
Workers have shown resourcefulness in shifting from office life to home life, and residential real estate has shown similar adaptability. However, while residential revels in its resilience, what happens to those other sectors that were mentioned earlier – hotels, office and retail? Well, perhaps they become residential, too.
Alternative uses are increasingly being explored for properties where occupier demand has fallen away. “It is too soon to point to real evidence of conversions to residential due to the pandemic, but there’s no question that there will be quite a lot of activity as a result of changing dynamics over the next couple of years,” says Adam Challis, head of EMEA living research and strategy at JLL.
Converting offices to residential is nothing new. As Challis notes: “This is a trend that has been around for some time and, post-pandemic, it will only accelerate.”