We’ve been no stranger to change this year and have felt yet another shift over the last month or so. In the second quarter, we saw a slight disruption in our San Diego market as investors were concerned about preserving liquidity in the face of COVID-19 uncertainty. However, with this delay in deploying capital, we now see local investors looking to make up for lost time.
New competition has arisen as investor groups look to fill commercial real estate investment allocations. Aside from this “use it or lose it” mentality, commercial real estate on its face presents a particularly attractive investment opportunity—as the gap between favorably low interest rates and high cap rates is the largest we’ve ever seen. In hand with these attractive terms, our clients have been particularly drawn to stabilized assets without value-add potential. While this may seem counterintuitive, construction is considerably more challenging and costly in our COVID-19 world, making a “sure thing” more valuable than the potential of higher returns.
SoCal’s Steady Strength
In Southern California, our multifamily market has benefited from the significant military presence. Investors have shown interest in the consistency provided by military apartment properties, especially with the potential of more rent deferrals during the pandemic.
While we haven’t seen collections slip until very recently, the gap between government assistance and economic normalization remains worrisome. At the same time, it’s important to note that even with recent stumbles, commercial real estate collections are stronger than what anyone expected at the onset of this pandemic.
While challenges remain, we know ourselves to be more seasoned in the COVID-19 era. We have grown and problem-solved alongside our clients, thanks largely to the help of technology. Yet, many aspects of our work are simply preferred to be done in-person—like diligence and inspections. Video has been a great resource during this time, but when you are looking to “kick the proverbial tire,” it is simply harder to do so virtually.
More Changes for Multifamily Ahead
Amidst this period of change, we’ve also seen shifts in renter needs. Most notably, there has been an increased attraction towards two-bedroom apartments, as people are itching for a little more space. Along with it, there’s been a recent trend of renter flight from urban to suburban areas—often trading a one-bedroom in the city center for a two-bedroom apartment on the outskirts of town. This will be a key trend for developers to track as we look to navigate life after COVID-19.
With all of these changes, there is uncertainty around what our future might hold. Will interest rates go up? Will competition increase, or even decrease? Regardless of these anxieties, I am confident in our long-view potential. COVID-19 has not changed my perception of the opportunities that exist within commercial real estate. I know we will come out the other side stronger than ever, and I am excited to continue our journey there.