Seeking Opportunity in Light of COVID-19

Where Can Pension Funds Find Value Across Real Estate?

By ARI RASTEGAR/Guest Contributor

As pension funds seek out opportunity in light of COVID-19, it’s crucial to understand the pandemic’s effects across real estate. While some asset classes have remained steady, and even thrived during the pandemic, others have experienced extreme volatility. Those that are on shaky ground were struggling pre-COVID, and the residual effects of the pandemic have only expediated their downfall.

Multifamily

Outside of the country’s largest metros, multifamily has generally held strong thanks to lower interest rates enabling streamlined borrowing. While multifamily in larger cities is experiencing rent and eviction freezes, the asset class is thriving in the suburbs and smaller metros. A combination of social distancing needs, a desire for more green space, and new work from home policies is causing renters to flee the densely populated skyscrapers of coastal cities for roomier, vintage multifamily complexes in smaller cities where rents aren’t as high and living standards are more affordable.

Retail

Arguably the hardest hit asset class, COVID only sped up retail’s downfall. Last year, more than 10,000 brick and mortar stores closed and we can expect to see even more in 2020. Now, more than ever, consumers are reliant on e-commerce, a trend that’s only going to continue, especially as occupancy in malls fall. Currently, occupancy rates in retail malls are at their lowest in a decade, at 94.4%, with some analyst estimating that one in four malls could be out of business by 2022.

Industrial

Retail’s struggles have been one of the factors that has driven industrial, which is standing strong and may even flourish in the upcoming months. E-commerce has driven the need for vast industrial space, and with the holidays around the corner, we’ll likely see an uptick in that sector. In the Tri-State area, we’re seeing both rent and leasing activity increase compared to last year.

Office

New work-from-home policies coupled with additional health and safety protocols have hit the office space hard, but eventually, I expect it to rebound. As humans, we’re communal beings and rely on in-person interaction for collaboration. Jamie Dimon, CEO of JPMorgan Chase & Co. recently stated that productivity is at an all-time low and remote work is no substitutive for organic interaction. Will everyone return to the office? No. Jobs like coders and computer engineers who have no reason to interact with others will likely be able to work from home forever, but service providers, creatives and those who rely on human interaction will likely be back in the office post pandemic.

Hospitality

Hotels, especially in large cities, have been hit hard, but we can expect them to have the greatest rebound. While occupancy rates in cities like New York, Los Angeles, Chicago, and Miami are down, extended stay hotels held a nearly 72% occupancy rate compared to the 42% industry average. Destination and resort hotels are also likely to see an uptick as cooped-up Americans are desperate to travel. Even this summer, after expectations where that beach towns and popular summer destinations would be desolate, more than 14 million hotel rooms were sold by mid-June. Sure, it’s half of what last year’s number was, but still double the amount of rooms sold in early April. Ultimately, we can expect to see lost equity in cities like New York, but overall, hospitality’s performance will be based on sector and location.

So, What Does this Mean for Pension Funds?

If you invested in portfolios outside of multifamily and industrial, it’s going to be painful, but there is opportunity and specific sectors, like hospitality and office, will eventually rebound. With REITs being the typical investment choice for pension funds, you’ll need to pay attention to the content of the portfolio of properties. Many REITs are touting the benefits of resilient portfolios that encompass sectors like multifamily and industrial, but that doesn’t mean they’re immune to the negative effects of the pandemic. To get through this pandemic, it’s critical that pension funds make their decision based on portfolio focus to ensure safe investment.

Rastegar Property Company is an Associate Member member of TEXPERS. The views expressed in this article are those of the authors and not necessarily Rastegar nor TEXPERS.

About the Author

Ari Rastegar is Founder and CEO of Rastegar Property Company.