Covid-19 has unsettled lives, upended livelihoods and disrupted plans, spawning grief, stress and anxiety. I think one sector, however, has benefitted from the pandemic: real estate. It may have had a rocky start with home sales dropping 18% from March to April 2020. But, as the pandemic drove more people from city centers to less densely populated areas, searching for spaces more suitable for remote work and learning, property prices soared at a record pace to hit record highs.
“You can see in just basically the last 15 months or so, we’ve seen a dramatic acceleration in home price growth to levels we haven’t seen in decades,” CoreLogic chief economist Frank Nothaft told CNBC. Industry watchers say the market is shaping up to look more like a boom rather than a bubble, with CNBC real estate correspondent Diana Olick noting: “A bubble tends to be something that’s inflated that could burst at any minute and change and that’s not really the case here.” Nothaft says the boost in demand is being fuelled by record-low mortgage rates alongside limited supply, noting that “prices are up and they’re up at the fastest pace since the ‘70s.”
Interest Rates During The Pandemic
Financial markets across the globe were undoubtedly pummeled by the pandemic. With the world in the deadly grip of Covid-19 and economies in a state of flux, supply chains were severely disrupted, businesses and factories shuttered and unemployment rates climbed. Amid the turmoil, the Federal Reserve stepped in, slashing interest rates to almost zero in April 2020, to help alleviate the financial burden of pandemic-induced shutdowns. In tandem, the 30-year fixed-rate mortgage rate was lowered. With lower interest rates, borrowers can build equity faster. In the current economic climate, however, rates can rise just as fast as they fall.
Supply Chain Challenges
Global shutdowns during the pandemic triggered supply chain disruptions that stalled property development ventures and drove up prices. Supply chain disruptions have also pushed up initial building costs, further impacting developers and other professionals in the industry.
With considerable pressure on the availability of basic materials, lumber, like 2x4s and plywood, has seen some of the sharpest swings, with up to 300% price increases, and huge backlogs to get these essential elements onsite. Tree harvesting scalebacks in the U.S. and Canada have contributed to the lumber shortage, along with border closures. Many mills were mothballed, plunging workers into the unemployment abyss.
Disruptions to steel, copper and aluminum production in China and the U.S. compounded the problem. To complicate matters even further, a superstorm thundered into Texas, shutting down several raw plastic and adhesives plants producing products for the building industry. Manufacturing challenges, meanwhile, affected the production of steel fabrications, roofing, insulation, windows, electrical gear, cabinets, flooring and equipment. Between June 2020 and June 2021, it was found that the prices of building materials rocketed by 26.1%!
The Tipped Balance Of Supply And Demand
U.S. Census data reported that 12.3 million new households were formed between 2012 and 2021, whereas only 7 million new single-family homes were built. And while the housing shortage was already a problem in the U.S. before Covid-19 struck, the pandemic ruthlessly exposed these shortages. The current boom has also spurred more bids on properties, further driving up prices. And as of 2021, the average sales price of a new home hit $453,700, up from the 2020 average of $391,900. Meanwhile, many commercial spaces sat vacant as people stayed home.
Coping With the Volatile Real Estate Landscape
There’s still debate as to how permanent or deep the effects of the pandemic will be, but what’s not in dispute is that Covid-19 has radically altered the real estate landscape.
And while the pandemic stopped many in their tracks, it set others in motion. Freed from the constraints of the traditional office, people realized they could easily Zoom into meetings, collaborate with colleagues and be productive whether 1,000 or 10 miles apart. Now, as the pandemic grinds on in its many mutations, many employers are wrestling with key issues (old for some, new for others): Who needs to come into the office and how often? What kind of spaces can make employees feel safe?
As a segment that has long been the foundation of commercial real estate portfolios, the office sector suffered a steep drop in sales volumes compared to pre-pandemic numbers. Anxious investors are now watching from the sidelines or have scaled back their property holdings, especially those not located in the so-called prime areas.
Regardless, the uncertainty has taken a toll. Those entities agile enough to quickly adapt to the changes have endured. As the founder of a company for hybrid workers, I’ve noticed some industry leaders are turning to this setup to side-step high office rental prices along with the overhead costs associated with maintaining properties. Here, many employers are looking to flexible workspaces, especially as employees’ demands for increased flexibility on not just where but how they are working grow ever louder.
I think flexibility is the new mantra moving forward. As more and more commercial leases expire, I believe the hybrid trend will likely gain more traction, and flexible-term leasing will continue to be a big driver of innovation in the commercial real-estate sector. Landlords keep their space occupied and their revenues intact, while renters utilize the same workspace for hybrid models. These types of arrangements are not viable with long-term contracts still in place.
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