United States

Real estate industry outlook


The COVID-19 pandemic has greatly disrupted the real estate industry, accelerating digital transformation and prompting a host of new operational standards. Closures and restrictions have had—and continue to have—an immediate impact on most sectors. While these setbacks have lingered longer than many anticipated, they are short-term in nature. Longer-term trends are now emerging, including increased flexibility and migration, which are set to have a lasting effect on where we live, work and learn.


  • The housing market is experiencing steady recovery, but supply has not kept pace.
  • Demand for affordable homes is driven largely by the pandemic-induced shift to remote work.
  • Offices are being reconfigured to ensure safety and physical distancing protocols, making newer properties and those in the suburbs increasingly attractive.
  • Student housing trends are similar to those in the corporate world; higher education is being pressured to embrace new safety protocols at a time when revenue is declining.

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Housing recovery has staying power

We entered 2020 with a bullish outlook on housing, expecting that for the first time since the Great Recession, new home starts would reach the 1.5 million annualized rate we believe is necessary to sustain market equilibrium. Then came the spring, normally the start of the home-buying season; with the country experiencing the height of the pandemic, homebuyer traffic fell through the floor and builder confidence followed suit. Homebuilders reduced production and housing starts fell to 934,000, while permits plummeted to 1,066,000. This stall in the marketplace threatened to significantly reduce the much-needed housing supply, which has been woefully low for much of the past decade.

Since April, when confidence and leading market indicators bottomed out, the housing market has experienced a steep and steady recovery. The Homebuyer Traffic Index reached a 10-year high of 65 in August, according to the National Association of Homebuilders. Fueled by low interest rates, the 30-year mortgage rate stands at 3.17% as of the middle of September, according to the Mortgage Bankers Association, down 95 basis points from a year ago, as millennial homebuyers come of age. More affordable mortgages have sent homebuilder confidence through the roof, with the NAHB traffic index rising to 84 as of the most recent NAHB survey released in August, matching the exuberance shown at the start of 2020.

Increased demand for homeownership in the suburbs is being aided by the recent shift to remote work spurred by the pandemic. Employers and employees alike have discovered that working from home is both viable and productive. Unshackled from downtown offices and daily commutes, homebuyers are looking for houses in more affordable markets with space for home offices. Nationally, home searches outside of prospective buyers’ current metro areas have steadily increased by 27% through the end of second quarter, according to Redfin.com. In major metro areas such as New York City, that figure rose to 35.7%, with the majority of home seekers looking to Atlanta and Philadelphia as potential destinations. These moves indicate that the work-from-home trend is here to stay and the single-family housing market will benefit as it races to meet demand.

New home inventory from confident homebuyers will be critical to sustain the market. Existing single-family inventories continue to run at about 1.3 million for 2020, a sustained low level of supply not seen in the past 40 years. Much supply has been sedated as baby boomers continue to age in place, a trend likely to increase as concerns over the impact of COVID-19 on densely populated elderly communities such as nursing homes weigh on relocation decisions. Meanwhile, the rise in telemedicine, accelerated by regulatory changes made to accommodate the health care industry during the pandemic, will help enable the elderly cohort to stay in their homes longer than any previous generation. The continued lack of supply and high demand, as illustrated by homebuyer traffic, leaves the market with only three months of supply. All of these factors have led to an incredibly hot housing market that is driving home prices up 8.2% year-over-year through July.

Still, some homebuilders caution that headwinds remain. Rising land prices and a complex regulatory environment have been regularly cited by the industry for decades as persistent constraints. Meanwhile, soaring lumber costs fueled by tariffs and large-scale forest fires in the tree-rich areas of the northwestern United States present major concern for homebuilders. Since June, lumber futures have soared 155%, a rate that has left many builders re-evaluating their long-term strategies. The wildfire damage is also leading to price volatility, underscored by a $300 one-day drop on Sept. 16.


One way to offset rising costs is for homebuilders to use their leverage in an undersupplied market to drive up prices. On a third-quarter earnings call, Stuart Miller, board chairman for Lennar, one of the largest homebuilders in the country, identified such a plan: “As we witnessed Lennar prices accelerate throughout the quarter, we deliberately sold today’s current inventory and limited sales on tomorrow’s yet-to-be started homes. Our strategy in the current market condition is to be patient with longer-term sales and enable price appreciation to offset future cost escalations and maximize margin; selling only more current inventory improves our inventory turn.”

“Our strategy in the current market condition is to be patient with longer-term sales and enable price appreciation to offset future cost escalations and maximize margin; selling only more current inventory improves our inventory turn.” - Stuart Miller, Board Chairman, Lennar

Squaring up the office with remote work

As pandemic-induced migration away from high-priced urban centers continues, the U.S. office segment is left coping with the fallout. The need to work from home offers workers greater flexibility in where they live. At the same time, employers are recognizing that the shift to remote work did not cause productivity to collapse, as many originally expected. Sixty-six percent of executives said that their remote workers were “completely effective or somewhat effective” in their jobs, according to the third-quarter RSM US Middle Market Business Index survey.

As more employees seek affordable homes farther from pricey urban locations, in particular New York and San Jose, organizations are increasingly embracing “hub-and-spoke” models to accommodate them, reducing the property value gap between the city and the suburbs. Hub-and-spoke calls for maintaining downtown headquarters, perhaps at a reduced size compared to before the pandemic, and then establishing a network of smaller offices in nearby suburban locations where employees and clients are based. And as the workforce incrementally reenters the traditional office, social distancing and safety measures will continue to be priorities, reversing the long-term trend of office densification. Companies and office landlords alike are responding with new protocols. These trends are expected to narrow the pricing and appreciation difference between suburban office and central business district office, which has been widening the RCA commercial property price index gap between the two asset classes, since the Great Recession.

Historically, office vacancy rates have been a primary indicator of market trends. In the current pandemic, though, companies continue to pay rent even if their workers are not physically in the office. Office rent receipt rates remained above 96% through July, according to NAREIT, which represents real estate investment trusts. Comparatively, office occupancy stands at just 10% to 15% in major national markets, CoStar data shows. As the economic downturn began only earlier this year, many office tenants are still in the midst of their existing long-term leases. Not yet being forced to make a decision allows them an opportunity to gauge how their needs for space best fit their future company strategies. While office vacancy rates have increased in San Francisco and New York, they remain well below the national average. Residential property, on the other hand, involves shorter leases, and migration away from cities is already having an impact on vacancy rates. The multifamily vacancy rate in San Francisco has grown four percentage points in the first three quarters of 2020, and now exceeds the national average. Rent growth in the office sector has been a better reflection of the current struggle for demand in major metropolitan markets. Even pre-pandemic, office rent growth had been on a decline for the last six quarters in gateway cities such as New York and San Francisco while nearby secondary cities showed stronger growth.

“For many companies, Slate included, culture is a key competitive advantage. Our view is that companies will not risk their ability to attract and retain the best people just to save money on office space.” - Steve Hodgson, CEO, Slate Office REIT

In order to best meet the needs of their organizations and staff, we expect companies will gravitate to a hybrid work model: individual-based work will be performed at or near the employee’s home and collaborative work will be done in the office. This will lead to a resurgence of the hub-and-spoke model.

Over the past decade, the average space per office employee severely declined to under 200 square feet, according to research firm JLL. Cubicles were piled next to each other with recycled air pumped through the building. When employees eventually do come back to the office, the workspace will look very different. Companies will deploy measures to ensure health safety and distancing, including temperature checks, high frequency cleaning and the installation of state-of-the-art HVAC equipment. Class A properties and newly constructed office buildings that provide these features will become more attractive when compared to existing properties that require retrofitting. Also attractive will be suburban offices that serve workers who have migrated away from urban centers.

Office property owners and investors need to be aware of these emerging trends in order to stay competitive in the market and to remain profitable. The reversal of office densification and desire for a safe work environment will push landlords to redesign existing floor plans and implement new procedures. There is still plenty of opportunity in the office sector with proper repositioning and tailoring to new tenant demands.

Student housing 2.0

For investors in student housing, the coronavirus has upended what was long considered a sector immune to economic cycles. After the Great Recession, investment in student housing skyrocketed, tripling in volume to $11 billion between 2014 and 2019, according to CBRE research. Demographics during this period were favorable as students returned to campuses for higher education in droves amid bleak job prospects. Enrollment in post-secondary education grew by 4.51% and 6.46% respectively during the 2007–2008 and 2008–2009 school years, well above the average 1.3% 20-year annual average rate, according to the National Center for Education Statistics (NCES).

While demand for higher education tends to be inversely related to strong economic performance, the NCES is generally forecasting an average 0.2% increase in enrollment annually for the next decade based on overall population trends. But even if enrollment remains steady, it’s becoming abundantly clear that the future of higher education now includes some form of remote learning that will affect on- and off-campus housing dynamics. Promisingly, leasing numbers through fall 2020 show that students are opting in for an on-campus experience, regardless of whether their classes are in-person or online. Nearly 90% of beds were pre-leased for the fall 2020 semester, a figure just 340 basis points below the year ago comparable leasing rate as tracked by RealPage.

Across industries, the pandemic has accelerated digital transformation trends, including investment in technology, and higher education is no different: Institutions are offering virtual learning platforms that carry an incremental costs, intensifying competition for market share as universities and students choose among myriad platforms vying for attention in the virtual learning world.

Understanding future demographic and technology trends affecting higher education is increasingly important as there will most certainly be further consolidation. This school year will be characterized by survival of the fittest: many colleges and universities are falling short of their funding expectations for the 2020–2021 school year as enrollment stalls and virtual offerings don’t produce the same revenue streams as live classes and room and board. The Chronicle of Higher Education reported that out of nearly 3,000 colleges tracked, 37.3% are moving forward with some sort of in-person model, another 33% were planning predominantly online experiences, and the remaining 30% were either undecided or have other plans.

The threat of a worsening pandemic and reports of emerging hot spots across college campuses as students return is worrisome for this school year. Spikes in positive tests continue to be reported across campuses with responses varying by institutions: The University of North Carolina at Chapel Hill and Notre Dame flipped from in-person classes to mainly online classes due to outbreaks while others shifted to fully remote learning for a semester or other period of remote learning before resumption of in-person instruction. If we’ve learned anything since the re-opening of campuses for the 2020–2021 school year, operational flexibility is key for schools. Meanwhile, tuition-paying students are now demanding tiered pricing for in-person and virtual instruction and the default to virtual will cause higher education institutions to take greater revenue hits in the short term.

Amid the revenue shortfalls, higher education isn’t catching a break from state and local governments that are themselves strapped for cash with some not yet fully recovered from the Great Recession. In fact, the Federal Reserve is closely monitoring the situation. In New England for example, the Federal Reserve Bank of Boston has identified 71 financially vulnerable higher education institutions within New England; this classification is given to those schools that have experienced enrollment decline over the last decade and have limited endowments to see them through the downturn. Even though the CARES Act authorized upward of $14 billion in emergency relief for higher education, the financial costs of the pandemic to colleges and universities nationally had surpassed the appropriated amounts by late April.

In conjunction with bearingthe impact of emerging educational technology platforms on future campus enrollment, student housing investors are underwriting the financial health of the universities they are invested in; they are making bets on the so-called “haves” and leaving behind the “have nots.” The top institutions with the best enrollment and endowments will therefore continue to command the greatest investment competition.

The loss of public funding means universities are getting creative with available budgets. The dated housing stock on many campuses originally built for communal living has fallen out of favor and is favorably positioning student housing players for increased public-private partnerships to solve for current and future housing needs. On average, the country’s largest 175 universities can house only 21.5% of their undergraduate population in on-campus student housing, RealPage data shows.

Bill Bayless, CEO for American Campus Communities, the largest provider of student housing, noted cautious optimism for the sector on a July earnings call. “Although we don’t expect a full return to normalcy in fall 2020, universities are focused on the policies and procedures necessary to promote a safe environment in the delivery of their academic curriculum this fall,” he said, adding that “our leasing trends and consumer sentiment at this time make us cautiously optimistic that we are on a path that many would have considered a best-case scenario at the outset of this pandemic.”

As the pandemic leaves its mark on higher education, student housing will look very different. Not unlike office properties, student housing will embrace new protocols for safety and social distancing, as schools reassess inventory needs going forward and the sector sees more consolidation.


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