There are three types of trends: uptrends, downtrends, and sideways trends. In the world of commercial real estate investing, the idea is to catch a trend on the upswing, but then has staying power to stick around in the long-run.
You want to avoid short-lived uptrends and you want to shun downtrends. For example, shopping malls have clearly been on the downtrend for years – coinciding with the rise in e-commerce. 25% of U.S. malls are expected to shut within 5 years. This is a downtrend to avoid.
COVID-19 has had a devastating effect on the economy and has had the effect of stalling certain trends, giving rise to new trends, while showing the resilience of others.
One trend that has stalled during the pandemic is the coworking office sector popularized by WeWork but that has yet to turn a profit. The jury is still out on whether this trend will be sustainable or even if it will be profitable once nationwide lockdowns ease and we enter a new normal.
A rising trend spurred by the pandemic is the demand for industrial space. Nationwide lockdowns have spurred a boom in the industrial space. The industrial sector was the direct beneficiary of the shift away from physical retail to e-commerce. Despite the economic downturn, in Q2 and Q3, the industrial sector experienced low vacancy rates, record-high asking rents, and positive net absorption.
The boom in e-commerce due to COVID has led to an increase in the demand for warehouse and distribution space. Along with the boom in e-commerce came a newfound desire by companies to rely less on China in the supply chain and to keep more inventory on hand to guard against supply chain disruptions.
It’s still not clear if demand for industrial space will be sustainable once social distancing restrictions are eased – especially in light of progress on the vaccine front and if relations with China are normalized if a new presidential administration more friendly to China takes over.
It can be confusing to sift through all the various trends happening at one time and which to invest in, but there are some simple rules of thumb to follow to be on the right side of that decision. Everyone wants to latch onto something with staying power but you want to make sure you’re investing in a trend and not a trendy investment.
How Do You Avoid Trendy Investments?
Trendy Investments like junk bonds in the ’80s, dot-coms in the late ’90s, asset-backed securities in the mid-’00s were incredibly popular during their time. They all received a tremendous amount of hype in the press – triggering feeding frenzies to invest in these trendy investments.
Besides hype, these trendy investments had other things in common. They were all short-lived but characterized by irrational enthusiasm. This excessive enthusiasm also meant inflated values that investors were more than willing to pay in the heyday but bottomed out once enthusiasm waned or the truth about the underlying economic fundamentals was exposed.
WeWork was a media darling that received a ton of exposure in no small part due to its charismatic CEO Adam Neumann, all of which had the effect of inflating the company’s valuation. Then the bottom fell out when the company’s underlying financials revealed massive losses and Neumann was ousted from the company. WeWork was trendy not a trend.
How to Spot a Lasting Trend
Investment trends, in contrast to trendy investments, are enduring and have far longer lifespans. Investment trends point to a paradigm shift in the market that satisfies some fundamental needs like shelter, communication, food, business productivity, health, etc. In other words, they’re driven by a consumer need that is expected to gain momentum over time. Trends guide the future.
To distinguish investment trends from trendy investments as yourself these questions:
- Does the investment fulfill a major need?
- Do the underlying economic fundamentals support sustainable profits?
- Who is investing in the asset?
The Affordable Housing Trend
Since the Financial Crisis, affordable housing has been on an uptrend with supply continually lagging demand with the gap ever-widening. There are several factors behind the affordable housing uptrend even as the economy has rebounded. One of the biggest factors is the fact that we’re becoming a renter nation with the demand for affordable housing leading the pack.
Here are some relevant factors giving rise to the affordable housing segment:
- Nearly two-thirds of renters nationwide say they can’t afford to buy a home and saving for a down payment will not happen any time soon.
- The National Low Income Housing Coalition (NLIHC) has found that the US needs more than 7 million affordable homes to meet the current housing demand for the nation’s more than 11 million extremely low-income families.
- According to a Harvard report, nearly half of renters were cost-burdened, meaning they spend 30 percent or more of their income on rent.
- New development of affordable housing is impeded by local planning boards plagued by the “not in my backyard,” or “NIMBY” attitude, favoring mid-level and high-end development projects to preserve local real estate values.
Adding to the problem of the affordable housing crisis is the pent up demand for affordable housing by Baby Boomers as many look to downsize to ensure adequate funds to last their entire retirements or to have funds to enjoy more activities.
Here are some of the statistics driving Baby Boomer’s demand for affordable housing.
- 40% of all Baby Boomers (approximately 30 million) are set to retire in the next 5 years
- 24% have no savings.
- Less than 30% are on track for retirement
- Roughly 50% will live off social security exclusively
It’s not just Baby Boomers driving demand for affordable housing, Millennials and immigrants are also putting pressure on affordable housing supply. Burdened with student loans and with home prices far outpacing wages, many Millennials can’t afford to buy their first home with many falling within the affordable housing demographic.
The Effects of COVID-19
The economic devastation brought on by the COVID-19 pandemic has hit low-income families the hardest. Even in light of rent assistance programs and economic stimulus programs, even the affordable multifamily segment – that was supply-constrained pre-pandemic – saw a downturn. Multifamily saw vacancies rise 30 bps (basis points) quarter over quarter and rents shrinking on average of 1.4% during the second quarter of 2020.
The Resilience of MHPs
Even as other multifamily segments dipped during the pandemic, there was one segment that saw an uptick. Mobile home parks (MHPs) had been riding the affordable housing uptrend in the aftermath of the Great Recession but there was uncertainty surrounding how the pandemic would affect this sector.
That question has now been answered. According to recent data, not only did MHPs not suffer a downturn but thrived. During the second quarter of 2020, vacancies in MHPs declined to record levels with rents seeing an average increase of 1.5% nationwide.
Supply-constrained affordable housing is magnified in the MHP space because there are few new parks being built due to strict zoning laws and the social stigma surrounding them. This would explain their resilience in the face of COVID-19.
As an investor, you don’t want to be on the wrong end of investing in a trend vs. a trendy investment. Wrong trends like states instituting extended rent moratoria and cities like Oakland banning background checks by landlords on potential tenants are the types of trends to avoid.
To sift out the trends with lasting power, look at the underlying fundamentals, and ask yourself:
- Does the investment fulfill a major need?
- Do the underlying economic fundamentals support sustainable profits?
- Who is investing in the asset?
Based on the answers to those questions, MHPs are a trend worth latching onto as it fulfills the major need of shelter; the underlying economic fundamentals as proven by the sector’s response to the pandemic has supported sustainable profits, and the investors the MHP sector is attracting are not bandwagon investors… it’s sophisticated investors with long-term investment windows. That’s a clear sign of the staying power of MHPs.
The MHP trend is not going away and would be a valuable asset to add to any portfolio to generate recession-thriving cash flow and long-term growth.
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