Updated: Mar 7
The COVID-19 pandemic has caused an upheaval in almost every industry, and that includes real estate. Many real estate investors are scrambling to determine whether their investments will be able to withstand the impact that the pandemic has on the economy. There is no right answer, as there are many different types of real estate investments, including commercial, retail, and multifamily.
While there will certainly be some real estate investments that will have adverse effects due to the pandemic, not all will be struggling. In addition to the type of real estate involved, the location where the investment is located might also play a key role as to whether or not the impact will be more or less severe.
Property Type 1: Those in COVID Hot Zones
You don’t have to be an expert to realize that real estate assets located in pandemic hot zones will not perform well. Originally, the hot zones were located in New York along with cities in the Northeast corridor and the Midwest. Today, those hot zones have shifted (to California for instance), and will continue to shift. However, one thing is clear: many people in the hot zones are moving either to other states, or to the suburbs where it’s less crowded and exposure is minimized.
I like to review reports, and in doing so I found an interesting correlation between last year’s performance and this year’s. One report in particular showed that over the past 12 months, the average return on multifamily properties was around 5%. If you look at markets that were in the hot zone like New York, the average return was around 1%. In Los Angeles, the average return was 3.75%. This shows the correlation between areas that were struggling with COVID-19, and their average returns over the past 12 months. It also shows that you want to avoid investing in assets located in hot zones, because they’re simply not performing that well thanks to the pandemic.
Property Type 2: C and D Asset Classes
The asset classes that are struggling the most right now are Class C and Class D properties. Class A properties are the luxury multifamily properties with all the amenities and are usually new construction or built within the past 7 to 10 years. Class B properties are somewhat older than Class A and may have some deferred maintenance. I like to buy Class B properties, as they’re the ones that we can renovate and upgrade in order to increase rents.
Class C properties are much older, usually built in the ‘60’s, 70’s and 80’s, and are located in areas that are not ideal. Class D properties are the oldest ones and have the most deferred maintenance. They’re often located in areas that are the least desirable, and have trouble attracting tenants.
The reason that Class C and D properties are struggling now are because the tenants are usually employed in the service industries, which have low paying jobs. These are the people who have lost their jobs due to the pandemic and are having the most trouble paying their rent. Currently, Class B are the highest performers, followed by Class A. Only then does Class C show up, followed by Class D as the lowest performing asset.
Property Type 3: Hands-off Sponsors
Even though I live in Southern California, most of the properties I own or manage are located in Texas, Georgia and Florida. Part of our process in managing our assets is to contact the property management company to review reports that include occupancy rates, vacancy rates, rent collections, and other metrics that show how the property is performing. Since COVID-19 began, we’ve been having these talks on almost a daily basis in order to stay on top of our property’s performance.