Over the past year as the pandemic has unfolded, it has been interesting to watch which sectors of the real estate industry have come out ahead, and which have struggled. It has certainly been a mixed bag. Certain areas of commercial real estate – particularly retail and hospitality – have experienced tremendous challenges. As recently reported in Newsweek Amplify, “During this pandemic period, the real estate investments suffering the most are those in commercial real estate. These are the retail shops and restaurants that are taking the brunt of the negative impact of the coronavirus lockdowns.”
On the other hand, sectors such as warehouse storage and fulfillment have done quite well. Commercial office space has mostly managed the crisis. However, that sector is not out of the woods just yet. Office leases tend to be longer-term (generally speaking), and tenants have not yet been in a position to renegotiate or adjust to their ongoing office space needs. Most industry experts expect to see a downgrade in the demand for office space by many companies. However, no one yet knows to what degree. Only time will tell.
In contrast, as we have discussed in the past, the residential real estate market is undergoing a tremendous surge in demand. That surge includes both the home ownership market (home buyers), as well as the residential leasing market (renters). The residential home buying market is currently experiencing a generational shortage of new and existing homes for sale. We have written extensively about this in the past (Soaring Home Prices Helping Homeowners Access Much-Needed Equity).
However, the residential rental market is experiencing strong demand as well. From the afore mentioned article, “The residential rental market can withstand the pandemic’s impact on the economy as renters continue and will continue to look for homes that they can afford. Once these people need to move about, they will look for rent-ready properties.” With a shortage of new and existing homes for sale, many families that might have purchased a home have been diverted into the rental market.
In addition, consumer real estate tastes shifted quickly over the past year. Many families made the decision to move from large city centers (such as New York, Chicago and San Francisco) into suburban locales as cities were locked down during the pandemic. Suburban locales offered outdoor access and amenities (such as more square footage) that simply were not available in the cities.
Unfortunately, as all of this movement was taking place, the restrictions caused by COVID19 also made the logistics of buying a home more challenging as well. In addition, the upsurge in construction demand has caused a shortage in building materials and labor. Rather than work through all of these challenges, many families seeking a home have made the logical switch to home rental. In this scenario, turnkey properties offered a compelling value proposition. From the Newsweek article, “Turnkey properties are ready to rent out. You just need to “turn the key.” These real estate properties have been repaired and renovated, so a tenant is ready to move in any time.”
For many reasons, these are challenging times for both renters and buyers. A home that is move-in ready, needing no construction materials and labor is an extremely valuable asset. Offering potential renters the opportunity to immediately move into a home with updated amenities is a tremendous advantage in this market. It is no surprise that this category of home is seeing some of the strongest demand.
As those who have been following Aloha over time know, turnkey real estate operators have been an excellent source of lending for the Fund. It allowed us to do volume, diversify across markets and deals, and also allowed for higher interest rates in our first few key years of growth. Like other segments of residential real estate, the turnkey rentals business has strong economic fundamentals that appear set to continue supporting the stable risk/reward framework which has served Aloha Fund well.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.