Erik Hayden is the Founder and Managing Partner of Urban Catalyst.
A global pandemic, contentious politics and natural disasters — what haven’t we experienced this past year? It seems like the whole world is focused on what this new year has in store. But when it comes to commercial real estate development, our view shouldn’t be so nearsighted.
The way I see it, the key to success for developers and investors during such tumultuous times is remembering we aren’t only building for the year ahead. We’re building for five, 10, 15 years down the road when the Covid-19 pandemic and its economic impacts will have long passed.
From my vantage point, it would be shortsighted to panic, halt or significantly alter the seven projects my real estate equity fund has underway in Silicon Valley just because 2021 is still turbulent. Like-minded developers and I are investing in commercial projects for a time when masks come off and folks return to everyday living and working — a time when we can welcome them back with new and improved live/work ecosystems.
Offices, mixed-use residential, retail, hotels, restaurants, bars: The immediate demand may seem uncertain, but the future need is unarguable. So, rather than try to predict what 2021 will look like or which trends will support another unpredictable year, let’s focus on what commercial real estate developers and investors should be doing to be successful a decade from now.
Four Ways To Prepare Now For 2031
1. Build, build, build.
Don’t stop building. Building during a down cycle means your projects will be first to market and ready to receive tenants when life returns to “normal.”
Take advantage of the fact that construction costs have dipped for the first time in a decade. According to the Turner Building Cost Index, the cumulative cost of non-residential construction costs fell about 1% nationwide by the second quarter of 2020.
Although it’s not the big drop I initially expected (construction expenses fell 20% during the 2008 recession), at least developers are getting some relief here. Anything is better than the sticker shock I got in 2018 when construction prices skyrocketed. The $110 million multifamily residential project I was building in Oakland, California, at the time suddenly cost $130 million.
Of course, I’m not saying that building right now will be an easy ride. Developers this year can expect to continue dealing with pandemic-induced challenges, such as skittish lenders. But patience and persistence will pay off in the future.
2. Diversify to survive.
If you’re “all in” on one kind of investment, now is the time to mix it up. Balance your portfolio across several sectors: residential, mixed-use, industrial, office. Relying too heavily on just one sector runs the risk of losing your entire portfolio if that niche falters.
Diversification can also mean looking at new programs, like opportunity zones, where there are tax benefits associated with bringing up communities that have been left behind for decades, especially now.
3. Consider a facelift.
Covid-19 has forced us to rethink what office space and work-life should look like. When tenants consider coming back into the office, they will realize that their current office space is inadequate to house everyone. That’s why office space is evolving with massive upgrades in technology and expanded layouts to accommodate social distancing.
The open-concept office is transitioning back to partitioned desks and offices. Tenants are looking for rooftop decks and open-air collaborative spaces. Touchless entry-points and bathrooms are a staple.
By the way, don’t believe the hype about “the death of office space.” It will come back in a big way with better buildings and better experiences.
I know the office market isn’t dead because I’m tracking commercial real estate investments here in Silicon Valley, where the city of San Jose recently entitled more than 1 million square feet of new office space. And a real estate group is moving ahead with five new projects that include 5 million square feet of offices that could accommodate 40,000 workers.
4. Focus on trends that will stick.
Focus on trends with staying power — not those that are fleeting. For example, suppose you’re a multifamily housing developer in an urban area. In that case, you might be worried when you read headlines about city folks ditching their metro apartments and fleeing to the suburbs to escape the virus and to find bigger homes.
Here in Silicon Valley, we don’t yet know the true size or effect of this so-called exodus. A recent population estimate found that California added 21,200 new residents between July 2019 and July 2020, but 135,600 people left. The question is whether this net-loss migration is just a short-term trend.
Consider the long-term trend: California’s population has increased year-over-year for the last 100 years. When life returns to “normal,” who is coming back? Remember, the tech jobs are still here; the California beauty is still here.
And as the vaccine becomes widely available and offices, shops and restaurants reopen, we must anticipate that many people will move back to cities, drawn by vibrant urban life and the desire to live near workplaces again. Also, remember that multifamily dwellings remain essential in locations where housing is limited: Freddie Mac estimated the national housing supply is short 3.3 million homes.
Developers who keep their eyes on the future won’t get left behind when apartments are again in high demand.
At the root of it, developers and investors must focus beyond 2021 to ensure long-term success. My advice? Keep your head down, avoid wallowing in negative daily headlines and remember that we aren’t building for 2021 — we are building for 2031.