Real estate markets globally have experienced one of the most tumultuous years on record. The global pandemic has significantly altered both the commercial and residential real estate industries. Some short-term changes will revert, but many others could persist. Investors would be wise to diversify carefully within real estate sectors and markets.
As reported in the Wall Street Journal, “The resulting changes in the housing market could have major effects on the economy. Fewer people commuting to work on any given day would reduce premiums on office space while taking a bite out of the sales of restaurants and retailers in business districts. Even slight sales losses could be a death sentence for businesses with low margins (When the Coronavirus Pandemic Settles Down, So Will Homeowners).”
That does not bode well for some commercial real estate sectors and is a great example why investors need diversification within real estate. Since we started our fund in 2015, we have been vocal proponents of adding exposure to residential real estate lending to investment portfolios. We have never pitched this as a replacement for commercial real estate investing. Rather, we believe that residential real estate lending is a solid and proven complement to commercial real estate investing (COVID19 Causing Significant Stress in Commercial Real Estate Here is How Investors Can Diversify).
These same pandemic-related changes could have an opposite effect on many residential markets. From the Wall Street Journal, “Having proven their ability to work remotely during the pandemic, more people will be able to work away from the office at least some of the time when the crisis is over. That makes the prospect of longer commutes to the office a little less onerous, increasing the appeal of living in the suburbs and exurbs.”
We are definitely seeing this dynamic play out in our portfolio. We have experienced increasing loan demand in a great many suburb and exurb markets nationally. However, the residential housing market is still experiencing an historical shortage of new-construction homes for sale. Many of these home buyers are being pushed into the market for existing homes.
As we have written in the past, this shortage of new-construction has significant implications for both potential home buyers and the professional ‘fix and flip’ market (Almost a Year Later, the Demand for Fix and Flip Still Strong). A great number of these buyers still have expectations of purchasing a home with modern features, design and construction. This dynamic will continue to lead to solid and stable returns in the fix and flip market – which is the primary target borrower for Aloha Capital.
Due to the pandemic, a great deal of uncertainty will continue to surround global real estate markets. We expect that to continue for some time. However, we believe that residential real estate lending can offer a stable and consistent stream of investment returns. A stability that is comforting to rely upon during periods of uncertainty like today.
Please feel free to give us a call. We are always happy to discuss our market views and investment strategy with interested investors.
Steve Sapourn is co-founder and portfolio manager at Aloha Capital. He specializes in designing low-risk portfolios that reliably out-perform benchmarks. Steve has managed alternative investments in a variety of asset classes for nearly 25 years. His accomplishments include creating and implementing quantitative trading strategies in the futures, stock, and volatility markets. He’s also served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies.