Between the lower interest rates, government bailouts, and economic challenges present during the current pandemic, real estate investing is likely to be heavily impacted, at least during the short term. In some cases, real estate investors may find themselves with unexpected opportunities, while other scenarios present difficulties.
While it’s not totally clear exactly how investment properties will be affected as yet, there are some likely changes that will occur.
Consequences for Rental Properties
The cash flow from rental properties, including single-family and multi-family housing, is likely to shift somewhat, as are the expenses involved in maintaining it.
Higher utilities costs
With more people staying inside, utilities costs are likely to increase. Land owners who retain utilities costs are likely to be negatively affected.
Lower rent escalations
Lower rent escalations may be necessary to keep tenants on your property during this time of economic uncertainty.
Potentially lower short-term revenue
In addition, the economic strain may prevent some tenants from being able to pay rent in full (or at all) for a time, meaning there’s a possibility of lost rental income to cover the mounting expenses.
As tenants shelter in place, there’s likely to be more wear on the property, causing it to depreciate faster.
Higher demand for rental housing
It’s not all bad though. The lower values on homes from decreased interest rates could mean greater potential for rental properties. People are likely to keep paying for housing, particularly in larger cities like Chicago, making rental properties among the more reliable options for investors.
Consequences for Commercial Properties
The consequences facing commercial properties vary by the type of property involved.
Potential decline in office space revenue
The long lease periods for office space could continue to provide consistent income after society recovers, but some businesses may be reluctant to sign on new leases for a time. This is especially true for businesses that have been negatively affected or who decide to shift to a more permanently remote workforce.
Decreased revenue for hotels
With far fewer people traveling, hotels and other hospitality properties will face a major hit to their revenue. Depending on how recovery goes, new hotel properties may not be built for some time.
Variable results for retail
Retail stores vary in how they’ll be impacted by the virus. Many stores have consistent business, meaning the property will continue to generate revenue. However, stores that become associated with the virus in a negative way could face a long-term downturn in income.
Consequences for Land Acquisition and Development
Land acquisition and development could face these changes:
More completed properties purchased
Investors will likely benefit from purchasing completed properties at lower than their initial development cost.
More favorable rates
The lower interest rates make financing new properties less expensive. However, the approval process for commercial financing could become more stringent as lenders seek to minimize risk.
Delays in shipping building materials and assets could slow down development, making it wise to invest in completed properties with existing improvements.
Navigating the Process
With the many risks likely to occur in the short term, real estate investors will want to make extra certain they navigate the process successfully, including in terms of drafting agreements, leases, and policies. A real estate attorney can help with that process by minimizing risk and safeguarding your best interests.