If you are a newcomer to commercial real estate syndication investing, you may be unsure of your next move as an investor. What are the predictable effects of significant reductions in urban populations on your portfolio? Everyone is familiar with the large current movement of city dwellers to the suburbs. The logical conclusion is that as the population decreases in urban centers, so does the demand for multi-unit housing and most commercial real estate.
This is certainly true for large apartment buildings or complexes and condominiums as well as urban office buildings. Investments in many major city restaurants, shopping centers, theaters and sports stadiums or arenas are now realizing losses. Yet some commercial real estate syndication investments will most likely still return good financial profits. For best results, you should seek the advice of your portfolio manager or investment advisor.
Cities With the Greatest Rates of Vacating Companies and Residents
Metropolitan areas with the largest numbers of vacating businesses and residents include New York, San Francisco, Los Angeles, Washington DC and Chicago. Many companies, large and small, were forced to leave major cities due to business shutdowns and community lock-downs during the height of the Covid-19 pandemic. Numerous companies experienced serious financial set-backs and losses.
Other businesses continued operations after laying off significant numbers of employees. The remaining staff members typically worked virtually from their homes. When it became obvious that this was not a short-term pandemic, large volumes of virtual workers left city areas. Both young single workers and families relocated to the suburbs to enjoy less costly and somewhat freer lifestyles.
Five Main Reasons from Employees for Relocating to the Suburbs
The top five reasons that relocating workers gave for moving to the suburbs were the following:
- Lower cost of living;
- Lower crime rates;
- Less fear of Covid-19 infection;
- Desire for a residential lifestyle during lock-down; and
- Convenience of more home work, schooling and study space.
Nearly 90 percent of U.S. companies permitted or required staff members to work from home throughout the pandemic. As a result, nearly 100 percent of all employees have developed a preference for working remotely or see its benefits. In addition, many workers with children are seeking suburban homes with private yards or neighborhood parks and green-spaces.
Impact of Urban Population Migration on Multifamily Property Investors
If you currently hold investments in urban multifamily properties as a syndication investor, you should consider diversifying your portfolio. Now is a good time to move into suburban area property investments. Real estate in general is now more affordable in outer city areas and surrounding regions. Consequently, the lower entry barrier for investing is attractive.
If you already hold investments in suburban properties, you can reap benefits due to increased rental rates based on demand. You should also gain profits from increased property values based on lower cap rates. Expectations concerning the future of multifamily real estate investments post-Covid-19 are varied.
However, due to the strong vacating trend in major urban centers, projections from many REI experts are favorable for multi-unit suburban properties. These investing advisors expect that investments in multifamily real estate in the suburbs will thrive for long-term investor profits.
More Current Trends in Urban-Suburban Commercial Real Estate Investing
The relocation of companies from city centers to suburban areas is also an important trend affecting commercial REI today. Commercial properties are less expensive in the suburbs. These properties are also usually conveniently located near transportation and other amenities. Even employees who favor remote work will often agree to working in office settings near their suburban homes. They can benefit from lighter traffic, shorter commutes and in many instances, free parking.
For many urban business owners, the current shift in CRE trends can pose difficulties. Most mid-to-large size businesses and corporations typically sign long-term leases on their offices or showrooms. Most sizable restaurants and retail establishments also have long-term lease agreements. Many of these business entities are now attempting to sublease these properties.
As an investor, you can benefit from watching commercial real estate trends closely. Urban CRE may have serious short-term challenges while business properties thrive in the suburbs. Yet these economic difficulties and struggles in urban CRE may also result in rare and lucrative investment opportunities for savvy syndication investors.
Of course, when you invest in commercial properties through a syndicate, you are investing only a small percentage of the total financial value of a property. You, the other participating investors and the sponsor are all sharing the total cost of the investment property. For this reason, you can make once-in-a-decade or generation investments that you might otherwise be hesitant or unable to undertake.
Key Points to Consider When Reevaluating Your CRE Portfolio
Essential points to keep in mind as you reevaluate your commercial real estate portfolio include the following:
- Guarantors Have Less Strength. Before the pandemic, if you invested through a CRE syndicate in a shopping mall, there were probably some top-selling, prominent retail tenants in these properties.
If these commercial tenants included a popular brand fitness center and a 24-hour major grocery market chain, you most likely benefited from substantial gains in equity. Yet due to the onset and duration of the pandemic, you may have experienced significant or heavy losses.
- Rent Adjustments Are Needed. Due to mandatory store closures after the onset of Covid-19, retail tenants lost revenues. Even when stores could reopen, social distancing requirements limited the number of shoppers allowed in stores at the same time.
Most retailers strive to keep their rent to sales ratios in the range of 5 to 10 percent. Higher ratios may threaten these merchants’ ability to pay monthly rental fees. During the pandemic, many commercial property landlords were forced to make rent adjustments just to maintain property occupancy rates.
- Ideal Location is Essential to Success. In the post-pandemic economy, location is more important that ever before. Investing in promising commercial real estate in a good location is crucial to gaining equity. In fact, a vital aspect when assessing a commercial development investing opportunity is having a thorough understanding of the locale.
Today, the most reliable CRE investments must be in a heavily trafficked area that offers a responsive and loyal customer base. Shopping malls and complexes must be in locations with predictable volumes of daily shoppers like stores situated within local commuter transportation centers.
- Demographics Are a Key Component. Before entering into a CRE syndication investment deal, it is wise to understand the demographics of the property’s locale. If you are investing in retail store properties, you need to know the average age and the lifestyles of residents in the area. It is helpful, also, to research these residents’ median economic levels and their current employment rates.
Other important factors are the average numbers of annual home sales and new renters in the area. You should also determine whether there are more families or single residents living in the vicinity of your retail property investment. If you are investing in a commercial office building, you need to know the qualifications of working age residents. Determine the types of job positions that most residents are currently engaged in or qualified to fill.
- Consumer Trends are Major Factors. Keeping updated on consumer trends in the area where your new CRE investment property is located is also extremely important. Throughout the height of the pandemic and especially during lock-down periods, consumers stayed at home for the most part. Many adults worked remotely from home while children attended virtual classes. During this time, there were significant shifts in consumer buying habits.
While sales rates for clothing and accessories lagged, buying numbers increased for household supplies, groceries, digital devices and accessories. There were greater sales volumes for home entertainment equipment and supplies while selling rates of luggage and travel accessories plummeted. Children’s toys and general home furnishings registered increasingly higher sales rates while winter sports equipment and outerwear fell in sales volumes.
- Consumer Response to Health Concerns. Whenever a condition exists that poses a health threat to their immediate environment, consumers in different locales may react differently. Some residents may make a fast decision to relocate when health hazards arise. Others tend to wait to see if these conditions improve or are resolved.
During the Covid-19 pandemic, residents in many metropolitan areas of the U.S. moved to the suburbs. Some chose to relocate to other cities, towns, states or regions. If you have investments in large multifamily properties, office buildings or other CRE, it is crucial to watch these migrations closely. By doing so, you can determine what changes to make in your commercial property portfolio to protect your financial interests.
Always keep updated on significant movements and shifts in population for areas in which you have CRE investments. When you do, you can make ongoing and considerable profits from syndication investing in lucrative commercial real estate.
Even during a major pandemic, savvy CRE investors who invest through syndications can learn to manage their property portfolios wisely. With expert advice from a professional portfolio manager or investment advisor and some focused research, they can prevail, even in difficult investing environments, gaining significant increases in profits.