FUNDAMENTALS
POSITIONING
The Ultimate Risk Management Playbook
NAVIGATING THE NEW REAL ESTATE LANDSCAPE
by Don Wenner
n the real estate market, many rightfully worried the COVID-19
of non-essential businesses led to tremendous economic uncertainty. We had never seen disruption like this, as even residential housing construction was halted in states like Washington, Michigan, and New York. To navigate that unpredictable landscape, many lenders and inves- tors wisely adopted a more conser- vative approach. While there’s much more reason for optimism now, that doesn’t mean you should abandon the risk mitiga- tion practices that got you through the pandemic. Because risks do remain. QUESTIONS ABOUT THE STRENGTH OF WORKFORCE HOUSING An eviction ban, expanded unem- ployment benefits, and billions in rental relief helped prevent a full- blown eviction crisis. However, the continued economic fallout of the pandemic has caused higher unem- ployment to persist. Rental housing investors should be aware of risks once stimulus money and protec- tions curb in the future. AN EVOLVING COMMERCIAL REAL ESTATE LANDSCAPE COVID-19 led to a remote work boom, and office space and retail stores suffered greatly. Global com- mercial real estate deal volume dropped 36 percent in 2020, accord- ing to Deloitte. Some cities were hit
worse than others. For instance, San Francisco had office vacancy rates near 20 percent in the first quarter of 2021 (versus six percent in 2020). Considering the pandemic will lead to long-term changes in how we work, shop, and live, commercial real estate still has a unique set of risks to consider going forward. MORE EXPENSIVE FINANCING Interest rates were incredibly low during 2020, and that helped prop up the residential housing market and made it cheaper for investors to buy properties. While average mortgage rates still remain low from a histori- cal standpoint, investors should keep
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pandemic would lead to another crisis. But we didn’t see the 2008 housing collapse play out again, as some predicted. From January 2020 to January 2021, CoreLogic research shows the average home price jumped 11.21 percent, with total home sales reaching their highest level since 2006. Thanks to the vaccine rollout, unprecedented federal stimulus, and gradual reopening, the broad- er economy has great momentum too. Economic growth is expected to skyrocket in 2021, with some experts calling for eight percent plus growth. So, we’re well past a year into the COVID-19 pandemic. Not only is the real estate market still standing strong, but we have more clarity on what to expect on the road ahead. There are a myriad of opportuni- ties and market fundamentals that remain solid, but risks do remain and there are weak spots. In this article, we’ll touch on the new reality in the real estate sector. And we’ll give you a risk manage- ment playbook to put you in a strong position going forward. THREATS REMAIN! STAY COMMITTED TO RISK MITIGATION At the onset of the pandemic, social distancing and the closing
a close eye on rate rises. RISING LUMBER PRICES
The price of lumber has increased by over 200 percent from a year ago. Experts predict pre-COVID lumber prices may never return. This will make renovations and new construc- tion more expensive than before. HAVEACONSERVATIVE, RESEARCH-ORIENTED CAPITAL PLAN Given these risks, and others, we still advise real estate entrepreneurs to keep a conservative capital plan, even as we come out of the pandem- ic. As we tell our clients at DLP Real Estate Capital, the main reason we
28 | think realty magazine :: june 2021
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