Trends in Real Estate: What’s the New Abnormal?

Are we in for a cyclical change or a permanent one? Let’s explore some market trends to find out.

Change is constant. The question is: What kind of change are we in? Is it cyclical, where things return to normal, or is it structural (permanent) where the change becomes the new abnormal? Is this a big shift or is it simply a cycle? What are the impacts on real estate values? Here are five questions real estate leaders are asking themselves.

1. Urban flight? Is the flight from populated cities temporary or permanent? Will the fear of being unsafe in a densely populated environment due to COVID-19 as well as the civil unrest cause urban flight? Or, will these fears subside with cities booming again? Does the ability to work from home accelerate the exodus? What about home prices in these cities? 
The Federal Housing Finance Authority’s Second Quarter Report lists San Francisco as the worst market in America for appreciation with negative 3.3% through the first six months of 2020. San Jose and Oakland are next on the list. New York is fifth. Baltimore and Chicago are seventh and eighth. All of them had negative appreciation in the second quarter.
The Wall Street Journal reports developers dropping prices on luxury condos in New York’s Manhattan by 30% to 50%. Do they know something, or is this the greatest buying opportunity of the past 10 years?

2. Working at home? Due to the COVID-19 lockdowns, many of us got used to working from home. Employers got used to it as well. Is this temporary or permanent? It depends on the industry you are in and the type of work you do. Studies of knowledge workers have found that they can work at home, but their productivity is about 20% to 25% less depending on the industry. In the past, some companies that tried work-from-home options have called their employees back into the office due to declining productivity. Will this happen again?

 In major cities where commuting times are long, perhaps a 20%-25% decline in productivity can be made up by substituting work time for commuting time. With high office rents, perhaps companies can mitigate a loss of productivity by renting less space. The Wall Street Journal estimates that actual human occupancy in New York office buildings this summer was only around 10%. Several buildings have announced conversion to apartments or condos.  

3. Future of mass transit? Fewer people living and working in urban environments requires less mass transit. Are people afraid to ride the trains due to COVID-19? Several mass transit lines have been shut down or scaled back. Remember when the hot real estate play was developing apartments and commercial right around the transit stations?   

4. Booming resorts and exurbs? It appears some of the migration from the cities is going into the resorts and the exurbs (small towns outside of the suburbs.) Prices are soaring. Will this continue? The most important amenity in these locations is high-speed internet for working at home. A concern: Many of these resorts and small towns don’t have the medical infrastructure to handle a significant increase in permanent population. In some cases, they don’t have the school capacity either.

5. Larger homes and ancestral housing? Can you see yourself being quarantined in this home? That’s the new soft-closing question by real estate professionals these days. Many people are answering “No!” They want a home office, a home gym, a room for homeschooling their kids, etc. They also need room for their adult child or elderly parent who moved back in. The demand for larger homes is accelerating. Are we moving toward ancestral housing—larger homes that stay in families for generations?

It’s too soon to tell what trends will stick and which will change once COVID-19 becomes less of an issue for our country. We are in a BIG SHIFT right now. How will it settle? That will be the new abnormal.