After the unforeseen volatility of 2020, CrowdStreet wanted to know how individual investors were thinking about real estate investing in 2021 and beyond. CrowdStreet was able to conduct a survey with 1,200 respondents, one of the largest of its kind. The survey results provide an insightful commercial real estate outlook for 2021 and beyond.
I'm particularly interested in their commercial real estate outlook given my existing 14 CRE investments worth roughly $500,000. Further, my main focus for 2021 is investing in private real estate investments given I dislike stock market volatility.
As an income-seeking investor who already has enough growth stocks, real estate provides the diversification I want in this economic recovery. At this stage, I'm much more comfortable investing in emerging real asset opportunities rather than expensive stocks that have already run.
CrowdStreet is one of the premier real estate crowdfunding platforms today. Their focus is on individual commercial real estate investments in 18-hour cities. Given the demographic shift towards lower-cost areas of the country, CrowdStreet is in the right space at the right time.
Let's find out the level of interest survey respondents have for real estate, their asset class and regional preferences and more.
Commercial Real Estate Outlook For 2021 And Beyond
A whopping 96% of respondents said they planned to make at least one commercial real estate (CRE) investment this year. Almost 30% are aiming to make four or more new investments.
Compared to 2020, investors told CrowdStreet they’re planning to temper their exposure to the stock market. Only 31% plan to invest more in stocks. While 48% will actually invest less in bonds (only 7% plan to invest more). That’s in comparison to the 55% who expect to invest more in CRE this year.
The American Association of Individual Investors tracks investor sentiment week over week. While pessimism fell to a 6-week low in February, it’s worth noting that investor sentiment and volatility often go hand-in-hand.
Given the roller coaster that was 2020, it’s not surprising some investors are looking to minimize their exposure to the stock market. Many are looking to real estate as a way to diversify their portfolios.
When CrowdStreet asked investors why they were interested in CRE, diversification edged out a win as their number one reason.
What kinds of commercial real estate are investors looking to invest in?
According to the Allen Matkins/ UCLA Anderson Forecast biannual commercial real estate survey, “investors are optimistic on multifamily and industrial product, but for retail and office, the outlook is dreary.”
CrowdStreet’s investor survey echoed this finding. Multifamily and industrial topping the most-favored list. Meanwhile, a whopping 75% of respondents showed no interest in retail.
Why are investors so bullish on multifamily?
Why are investors seemingly so confident in multifamily? With job losses mounting at the outset of the pandemic, there was immediate concern we’d see significant spikes in vacancy rates and lease defaults.
However, as the pandemic unfolded, we witnessed a noticeable shift in renter behavior. People migrated from highly populated urban centers to the suburbs in search of larger units and less densely populated multifamily communities.
Overall vacancy rates for suburban multifamily declined, with a 6% national vacancy in Q3 2020. While downtown multifamily occupancy increased to around 9%.
However, government intervention helped protect this sector with both a monetary stimulus, as well as by implementing an eviction moratorium. Consequently, rent collections never dropped below 93% in 2020, as reported by the National Multifamily Housing Council. Final collection rates were, but still close, to 2019 rates.
Renters may be on the move, but everyone has to live somewhere.
What is the bull case on industrial property?
When it comes to industrial, investors have reason to believe in the long-term success of this asset class. Industrial property values steadily increased over the course of 2020 thanks, in large part, to the dramatic spike in online shopping driven by the pandemic.
While the stratospheric growth rate of 2020 will almost certainly temper in the years ahead, a report published by Green Street Advisors in October 2020 anticipated that 30% of all retail sales will occur online by 2030.
Translating that growth rate to demand for industrial real estate, JLL projects that the U.S. will require an additional one billion square feet of industrial real estate by 2025.
Asking rents are expected to continue to increase year-over-year, according to Cushman & Wakefield. While Green Street Advisors projects the industrial sector to be one of only two asset types (along with manufactured housing) to see strong net-operating-income (NOI) growth in 2021.
Why the worry in retail real estate?
On the flipside, it’s not hard to see why investors are wary of retail. As the second hardest hit asset type after hotels, the retail sector entered 2021 in a weakened state.
Aside from grocery stores, most retail locations still remain severely limited in their operations. Until the wide-spread distribution of a vaccine, they will likely be allowed to open only under strict safety guidelines.
In addition to what, CrowdStreet found that investors also had a preference for regional location. The Southeast was the clear region winner, beating the Midwest and Mountain Region by 13 percentage points.
Institutional investors agree. Invitation Homes and Rockpoint Group formed a joint venture to acquire and operate single-family rentals in the Western US, Southeast US, Florida, and Texas.
Meanwhile, multifamily firm RangeWater launched an $800 million platform to build and operate single-family rental communities. This is what CrowdStreet calls Build-to-Rent, in the Sunbelt region.
Last but not least, CrowdStreet wanted to know if there were any deal specifics that investors valued.
What type of deal specifics do investors value?
Overall, investors focused on reliability when evaluating an investment opportunity. Well over half marked Sponsor Experience and the Overall Business Plan as very important to their evaluation process.
The next most important factors for investors when evaluating a CRE investment opportunity are Targeted IRR, Potential Cash Flow, Risk Profile, Asset Class, Geography, and ESG (Environmental, Social, Governance) factors.
After the 2020 roller coaster, it seems like investors are valuing sponsors who have experienced several economic cycles and successfully weathered the ups and downs more than other factors.
And it makes sense. When you bought your house, think about how much due diligence the bank did on you versus the property. Maybe there was a two-page report that valued the house and land. But underwriters probably had 50+ pages on you and your financial history. That’s because the bank knows that you are the risk factor, not the house.
When it comes to CRE, the firm behind the deal (sponsor) is the one responsible for shepherding an investor’s capital through the ups and downs. Investors want to know they can trust the folks they’re giving their investment to.
As one investor told CrowdStreet, “I like value-add with the right business plan and the team to see it through.”
Investing In CRE In 2021 And Beyond
Across the board, CrowdStreet found that investors value real estate’s multifaceted benefits. Investors are particularly using CRE to spread out the risk in their portfolios and to protect their capital.
Investors are looking to invest in regions and asset classes that were on the rise before March 2020 and, ergo, will likely recover first. The commercial real estate outlook looks promising as the vaccine rollout continues.
When evaluating a deal, I agree with survey respondents that selected Sponsor Experience as the most important factor. I want to invest with a sponsor who has been through the good and the bad. Investing with a sponsor who has only seen a bull market is not ideal.
In a low interest rate environment, real estate is my favored asset class to generate higher yields and capital returns. As an accredited investor, you can join CrowdStreet here and follow the latest investment offerings.
I prefer investing in private real estate investments versus expensive stocks at this juncture. The combination of rising rents and rising capital values is very attractive.
Dear Financial Samurai,
The decision maker (wife) and I are getting funds lined up for investing in Crowdstreet via ROTH IRA and outside of tax shelter.
I have concerns over capital calls. I have not had success locating operating agreements specifying how big a capital call may be in the investments we are looking at.
Hypothetical of 25,000 invested. Could they have a capital call of $50,000 2 years down the road to close the deal? If I don’t provide the $50,000 then we are diluted/lose initial investment?
Are capital calls generally capped at the original investment amount?
Any education is appreciated.
JH
Has anyone done an analysis of the pros vs cons of Crowd Street vs. a Real Estate Private Equity fund vs. Syndication vs. REITs?
Good insights, thanks! I totally agree with the high interest in multifamily and no interest in retail. It’s kind of crazy that I haven’t set foot in a retail store in over a year now. Normally I would once every 1-2 weeks even if just for the exercise and to browse. The pandemic sure has changed so much. I’m still planning on investing in stocks and bonds this year, albeit cautiously. My CRE and REC and general real estate exposure is doing pretty well but I plan to remain somewhat conservative all around. I just hope we end this pandemic this year and don’t have to go through another one in our lifetimes.
A friend just told me that the local mall is open. I was like, “huh?” It’s been open for 6 months, but I haven’t even though about going at all!
That said, I do need to get my eyes check again and the store is at the mall. I think I’m going to wait until end of the year. Just gotta hold on!
Poor retail and office. Hospitality will clearly come back.
But I worry about the local office landscape especially. We were already flush with a surplus of offices that were all meh Class B/C type stuff. I don’t really know how that recovers. I know I personally would rather not work at home at the moment, but that is only because my kids are not yet in school.
The shift to WFH is clearly going to be a huge impact. My former employer was 100% against it and about a month into the pandemic was terminating leases like they were going out business. The CEO will never again be opposed to WFH.
I’ve got to imagine office places will be reconfigured and/or utilized for other things. They must be and they will be over time.
As someone who has been “working” for home since 2012, more people working from home has started to crowd out many of my middle-of-the-weekday activities. For example, it’s tough to get a court at 10:30am Mon-Friday anymore. Gotta get on it ASAP!
So I do hope we get to herd immunity sooner and more people get back to work. Actually, the more people who go to work, the more people slack off and surf the web, which is good for my traffic lol.
I’m loving my real estate moves. 10 years ago, I picked up 3 residential rental properties (single family homes) in a suburban area for 100k each. They are currently valued at 300k+ each. Through leverage, I’ve never spent a penny out of my own pocket on them, and the second one will paid off entirely, in 5 months.
My commercial exposure consists of a small (1200 sf) office space stand alone structure that my business partner and I went 50/50 on and bought through an LLC. My thought has always been, even if I make 100k on it, after sale and taxes, it beats the hell out of renting in a strip mall for 30 years!
Why won’t real estate investments act like bonds and decline with the rise in interest rates?
Hi Kurt, yes, at the margin, a rise in interest rates will slow down real estate demand due to higher borrowing costs. However, medium-to-longer term, a steeping yield curve and rise in interest rates is signifying an acceleration and improvement in the economy.
Given interest rates and mortgage rates are at abnormally low levels, borrowing costs are still low even if the 10-year bond yield ticks up to 1.5% – 2%. The real sensitivity to higher rates are growth stocks with extremely high valuations.
Real estate has the ability to increase income through rent increases. Unlike bonds. The shorter term the leases the quicker you can increase income. Supply and demand always drive the rents however
Yes, real estate you can reset your rates anywhere from nightly (hotels) to every few years (retail). Bonds? Well, for new bonds it can increase but existing are locked unless float, which most float is short term in nature.