If I've learned anything in my career as an investor, it's that the real estate market is constantly changing. An investment strategy or market area once ripe with opportunity can quickly dry up. A big part of being a successful real estate investor is being able to identify present market opportunities and having the flexibility and forethought to pivot to take advantage of them.
2020 was a really tough year for real estate, but even in down markets, there's still opportunity for prime real estate investing. Here are the five biggest real estate investment opportunities I see for 2021.
Adaptive reuse of unwanted retail, hotel, and office space
Adaptive reuse, the process of converting and redeveloping unwanted real estate into a different type of real estate that better serves current and future market demand, will undoubtedly be what saves many commercial investors in the wake of the global pandemic. Hotels and entertainment venues, office buildings, and retail were severely impacted by the coronavirus crisis. Recent reopenings have helped subside the impact a bit, but unprecedentedly low demand has resulted in a number of businesses closing their doors or filing bankruptcy.
Recovery is inevitable, but it will take time, and suffering property owners will need to get creative in the meantime. Affordable housing and industrial real estate are two sectors in high demand. Turning an old hotel in the heart of the city into an affordable housing project or converting an old retail building into an industrial distribution center or warehouse may be a more profitable long-term solution. While there are definitely a number of hurdles to overcome in this process, including zoning and city regulations, I think there's a lot of opportunity here.
Industrial real estate
Industrial real estate has been one of the top-performing sectors of commercial real estate for the past several years based on returns and demand. In many ways, the global pandemic accelerated the demand for industrial space, putting pressure on cold storage, warehouses and distribution centers, and data centers in particular. While this recent demand is likely just a temporary surge, it's very likely this sector will continue to have a strong year and opportunity for continued growth in 2021.
There's talk of a potential foreclosure wave coming in 2021, pending no national foreclosure moratoriums or protections enacted by the incoming Biden administration. As of October 2020, 4.57% of all residential loans are 90 days or more delinquent, which equates to about 2.258 million, according to Black Knight (NYSE: BKI). This number doesn't include the 202,000 forbearance plans that were set to expire in November 2020.
There's tremendous pressure on lenders and servicers to maintain these debt obligations, which is why the government has been using quantitative easing, the slow and steady influx of cash into the financial markets to help keep them afloat. But that can only last for so long.
Eventually, banks will be forced to reconcile their books and either foreclose on the delinquent loans or sell the loans at a loss. Neither scenario plays well for the banks, but in most cases, the mass sale of delinquent loans is the easier route, giving them the cash they want and need now while reducing their overall burden.
Before the foreclosure wave that followed the Great Recession, millions of nonperforming mortgages were sold on the secondary market. Investors large and small were able to purchase these loans at a steep discount, working to find a long-term resolution for the delinquency, which can include a forbearance plan, modifying the loan, a deed in lieu, or foreclosure.
Foreclosures take time, and investors hoping for a sudden spike in foreclosure properties to hit the market in 2021 are missing the real opportunity. I personally got my start in real estate investing with nonperforming notes (NPNs) just after the Great Recession, and I'm preparing myself heavily for the wave of NPNs that are sure to hit the market both in the residential and commercial markets.
Rental property in depressed markets from tight-strapped landlords
While many rental markets are seeing an uptick in demand and rental rates, others aren't so lucky. High-density urban areas are experiencing a mass exodus of residents fleeing the expensive and populated metro centers for more space and budget-friendly accomodations in the suburbs. Eviction moratoriums have left hundreds of thousands of landlords in the dust, unable to evict nonpaying tenants but still responsible for maintaining the property and paying taxes, insurance, and their mortgage.
Many tight-strapped landlords will eventually be forced to sell. Investors with the patience and capital to ride out the current wave can possibly pick up these rental investments at a discount.
Fix and flip
The fix-and-flip market has been super active in 2020. Initial worries about another real estate bubble were quickly put to rest as home values increased dramatically and demand outpaced supply in most markets. At the end of 2019 and the start of 2020, fix-and-flip activity was up, but profits were down. Things reversed in the second quarter of 2020 as some investors took a step back from the market to see how the coronavirus pandemic would play out.
Considering demand remains high for newly renovated homes, I believe 2021 will be another active year for investors looking to fix and flip. Investors will need to be diligent with their numbers, as I predict the hot real estate market will drive investors back into the business, increasing competition and pushing returns down.
The Millionacres bottom line
I personally believe these five investment sectors hold the most opportunity in the coming year but realize everything could change quickly. If things continue on their current track, however, I believe 2021 could play out to be a very profitable year for investors who are informed and ready. As always, investors should conduct their own due diligence about each investment.