Single-family homes are flying off the shelves. Commercial real estate is struggling.

But whatever you might say about the real estate market, you can bet the situation won’t remain that way for long. Those familiar with the market say residential real estate is already starting to cool off after the boom that started late last year. And yet at the same time, commercial real estate (including offices, warehouses and business sites) is seeing light at the end of the Covid-19 tunnel.

Nothing is static in this business. Different types of investments face their own different pressures.

“Last year, there was concern regarding how commercial real estate would weather the pandemic,” says Raj Dhanda, CEO of Black Creek Group, a real estate investment management firm based in Denver. “Despite this concern, we believe fundamentals are healthy, especially in the industrial and multifamily sectors. Commercial real estate is emerging from the pandemic strong and stable, and we are seeing an increasing interest in private real estate.”

“Leadership in the real estate sector can ebb and flow as market forces impact residential and commercial real estate differently,” wrote Cinthia Murphy in a report on ETF.com, a research and analysis firm for the exchange-traded funds market. “If 2020 was a banner year for housing, 2021 is shaping up to be a great year for commercial real estate.

“Housing ETFs rallied to record highs in the past 12 months or so as inventories dwindled in the face of ever-growing home buyer appetite and mortgage rates at multi-decade lows,” Murphy said. However, “we know that market narratives certainly do change on a dime.”

Others who track the divergences in the various sectors of the real estate market agree.

“Today, the issue of a robust recovery [from the 2020 economic shutdown] is no longer a question of if, but rather when,” says Calvin Schnure, senior economist and senior vice president for research and economic analysis at Nareit, the National Association of Real Estate Investment Trusts. “Vigorous growth over the remainder of this year and next year will spur the demand for all types of commercial real estate and help stimulate a stronger recovery for REITs.”

There is a new “unevenness” in the real estate market, in part because of the impossibility of restarting the economy all at once, Schnure adds.

Drew Reynolds, the chief investment officer of Realized Holdings in Austin, Texas, noted that residential property “came out roaring” late in the pandemic. “Home prices were up pretty dramatically. Prices are not going to come down, although they will stabilize.” Realized Holdings is a support organization for real estate investors, especially for 1031 exchanges. (Section 1031 of the Internal Revenue Code allows real estate sellers to avoid capital gains taxes on the profits of a sale if they identify another similar property to buy within 45 days and make the purchase within 180 days.)

The sales of existing homes are being prompted by persistently low interest rates and the fact that there are almost never enough new homes built to meet demand. Between 1.6 million and 1.7 million new homes are built each year even though approximately 2.1 million are needed, says David Copp, portfolio manager for the TIAA-CREF Real Estate Securities Fund. Last year, there were 6.5 million homes sold in the United States, and that number is projected to increase to 7.1 million this year, according to Statista, a research and statistical firm covering real estate.

Multi-Family Sees Strong Demand
Multi-family properties are also seeing strong demand. “We continue to see solid rent growth,” Dhanda says, “especially in the suburban markets, as people are finding it easier to relocate as their primary office location may no longer dictate their living situation.”

Reynolds adds: “For those investors who own portfolios of single-family homes, even if it is only five or 10 properties, they may want to consider looking to buyers outside their local market. Depending on the market in which the properties are located, institutional buyers are incredibly active in the space right now and may provide a more efficient sale and potentially better pricing.”

Even though there has already been some slippage in the last few months, residential real estate demand is still up markedly from the beginning of the pandemic. Sales of single-family homes, town houses, condominiums and co-ops dropped 2.7% from March to April this year, but were up nearly 40% in April from April 2020, according to the National Association of Realtors.

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