No one could have predicted the events of 2020. Between a global pandemic, volatile politics, and already changing real estate trends, making the right investments last year was especially challenging.
What will the real estate investing market look like in 2021? It's hard to tell. We asked over 250 readers of our Paydirt newsletter -- as well as several of our real estate investing experts -- for their 2021 real estate predictions.
We heard a lot of interesting ideas, but a few trends rose to the top.
- Investors think mortgage rates will remain around 3% in 2021. Our expert agrees.
- Medical will be the hottest type of CRE property in the coming year, according to 39% of our investors, with industrial a close second (32%). Our expert sees continued problems in the retail sector.
- 40% of investor respondents say that housing prices will stay high through 2021.
- Big-city rents won't return to pre-pandemic levels this year, according to 73% of respondents. Our experts think housing reform could spur increased interest in high-density development.
- Only 16% of respondents say they'll definitely be investing in an opportunity zone in 2021, while 40% are open to it. Our expert says this could be a good year to invest in these zones.
Table of Contents
- Mortgage Rates
- Commercial Real Estate
- Housing Starts
- Real Estate Development
- Property Taxes
- Opportunity Zones
- Evictions and Housing Reform
- Venture Capital
Investors say mortgage rates will stay low in 2021
Most of our survey respondents think mortgage rates will stay low through this year.
Our readers predict an average mortgage rate of 3% in 2021. While that's slightly higher than today's rate -- just 2.77%, according to Freddie Mac (OTCMKTS: FMCC) -- it's still very low, historically speaking.
The prediction also falls in line with what major industry players have predicted. Fannie Mae (OTCMKTS: FNMA), for example, forecasts a 2.8% rate for 2021, while Freddie Mac predicts 3% even.
Our expert's take on mortgage rates: 3%
"As 2019 came to a close, I predicted that mortgage rates would fall to record lows in 2020," says Matt Frankel, CFP. That prediction came to pass.
Frankel says that slowing economic growth and the trade war with China drove this prediction, but COVID-19 was the nail in the coffin.
So what does he see for 2021?
"I predict that rates will stay around their current record-low levels for at least the next year or so. There's a tremendous amount of economic uncertainty surrounding the pandemic that will likely linger for a while. And the Federal Reserve has made it quite clear that it doesn't foresee itself increasing benchmark interest rates anytime soon."
"This is by no means a certainty," Frankel is careful to remind readers.
"[T]here are some possible catalysts that could cause mortgage rates to rise, but I'd be quite surprised if we end 2021 with average 30-year mortgage rates greater than 3%."
Investors say CRE will be all about medical in 2021
According to Paydirt readers, medical and life science properties will be the hottest sector in commercial real estate in 2021. 2020 was a very volatile year for commercial investors, with lots of worrying CRE numbers.
We asked respondents which sector would be the biggest winner this year, and here's what they said:
- Medical and life science properties: 39%
- Industrial properties: 32%
- Self-storage properties: 18%
- Office properties: 2%
- Other: 8%
- No response: 1%
It's no surprise that office CRE doesn't feel like a safe bet with the world going remote in response to COVID-19.
"The pandemic is de-emphasizing the unnecessary conventional office model," said one of our respondents, "and there will be an increasing number of people realizing they don't have to live in crowded cities to be gainfully employed and can have a better quality of life elsewhere."
Confidence in retail is low among our readers, but it's not at zero. Another respondent said this: "Retail real estate properties will slowly bounce back up, as people will want to go out to shop again -- this time appreciating what a trip outside of the house can do for you mentally."
It's also important to remember that the effect of COVID-19 on retail varies by location.
Our expert's take on CRE: retail will continue to suffer
Maurie Backman points out that Daniel B. Kline's predictions for 2020 have come to pass: not only that store closures would continue into 2020, but also "that malls would pivot to add more non-retail establishments to the mix -- specifically gyms, coworking spaces, and expanded restaurants."
"As of Nov. 30, an estimated 8,379 stores have closed this year, according to Coresight Research," says Backman. She adds that Coresight predicted at least 20,000 closures earlier in the year.
"Looking ahead into 2021, it's clear this trend will continue," she says.
Because a widely available coronavirus vaccine is at least several months away, Backman sees nonessential retailers being hit with additional restrictions.
"Plus, many consumers are just plain afraid to shop in stores, and given the economic crisis at hand, many also can't afford to. A sluggish holiday season could therefore pave the way to additional retail closings in the coming year."
"All of this is particularly bad news for mall operators, who can't afford to keep losing tenants -- especially department store anchors. It'll be interesting to see if malls take a proactive approach to the ongoing crisis by expanding their tenant base in 2021 in an effort to get ahead of retail closures."
Backman sees one area that could help spark a bit more life in malls: healthcare. Specifically, walk-in clinics and diagnostic centers.
"It may be a little unconventional to sandwich a doctor's office between a clothing store and an accessory shop," she says, "but if it brings in the revenue malls need, so be it."
Investors say housing starts and pricing will stay strong in 2021
According to Census Bureau data, new residential construction has been booming lately. In December 2020, the country had clocked more than 1.6 million housing unit starts (seasonally adjusted). That's up a solid 5% year over year.
Our survey respondents largely think the trend will continue, predicting around 1.4 million starts for 2021. That's down slightly from today's numbers but on par with other industry projections. Both the Mortgage Bankers Association and Fannie Mae also predict 1.4 million starts for the bulk of next year.
On the back of surging homebuyer demand and the lowest inventory levels on record, home prices skyrocketed in 2020. According to the Federal Housing Finance Agency, home prices rose 7.8% in the third quarter alone.
We asked our respondents if an end was in sight, and nearly 40% said definitely not. Of the few that were optimistic, the majority said they don't expect relief until later in the year.
Investors say big cities will continue to struggle in 2021
Urban areas saw big population losses in 2020. In efforts to socially distance -- not to mention spread out while stuck at home -- millions of urbanites packed up and left, leaving many major cities with rising vacancy rates, plummeting rents, and ever-struggling economies.
Though vaccines offer some hope for these troubled towns, it doesn't seem like there's much optimism that rents can bounce back. In fact, our Paydirt readers overwhelmingly believe they won't. A whopping 72.9% said big-city rents will not come back to pre-pandemic levels in 2021.
One of our respondents predicted "[c]ontinued new homebuilding in suburbs and smaller cities as there continues to be an exodus out of congested cities. Also, continued out-migration from California to other less populated and less expensive western states."
Our expert's take on big cities: reform may help high-density development
Lena Katz predicted that clashes over higher-density multifamily development, particularly low- and medium-income, would intensify in 2020.
"I hoped that social responsibility would prevail," she says. "It feels like the entire nationwide argument has been sidelined by COVID-19," though Katz believes the need for housing reform has intensified.
She points out that the need to house traveling healthcare workers, the spike in Americans who can't keep up with mortgage payments, and the fact that "the pandemic threw social safety net issues into stark relief" has highlighted the need for socially responsible development.
"Of course, this could also have to do with the downward spiral in demand for luxury condos in urban core areas. Developers are looking for other products that may have more appeal."
The COVID-19 pandemic, says Katz, has changed the desire for high-density development.
"[P]eople are afraid of living in population density these days -- are fleeing it, in fact. Many people with privilege are moving to the suburbs or rural regions. And ambitious projects that were approved in the past two years have seen construction stalled due to lack of resources."
"Basically, issues of housing inventory supply and demand have been turned inside out and shaken all around by the pandemic, but the need for housing reform remains."
Katz predicts that we'll see some movement on housing reform in 2021, as both Democrats and Republicans have expressed interest in curbing 2020's alarming housing trends.
Investors are not concerned about rising property taxes in 2021
Our own Maurie Backman predicts homeowners could see a rise in property taxes this year, largely due to declining business revenues and struggling municipalities.
But our survey respondents? They're not too worried. When asked about a tax hike, our respondents averaged "slightly concerned."
The response is surprising, particularly considering those home price predictions noted above. As we all know, when home values rise, so do tax bills -- and values will likely rise considerably as we get further into 2021.
Investors are not sure about opportunity zone investing in 2021
Only 16% of our respondents said they're definitely planning some opportunity zone investing this year, while over 40% say they're open to it.
With many investors still not sure if opportunity zones are for them, savvy investors who understand the risks may want to look into high-growth opportunity zones for investments in 2021.
Our expert's take on opportunity zones: 2021 could be a great year to invest
"Well, that aged like hot mayonnaise," says Tyler Crowe. Doesn't that just sum up 2020?
"December 31, 2019, was a pivotal date for opportunity zone investing. It was the last time someone could invest in a qualified opportunity zone and receive the maximum tax benefit. Unsurprisingly, there was a mad dash to invest in opportunity zone-eligible deals and opportunity zone funds at the end of last year."
"According to consulting firm Novogradac, more money was put into qualified opportunity zone funds in the last three months of 2019 than what had previously been put into the entire program," explains Crowe.
"Because of this, I thought that 2020 would be a down year for opportunity zone investment. The extra tax benefit of getting in before the end of 2019 would push people to invest, and then opportunity zone funds wouldn't raise nearly as much."
That entire prediction got smashed by the coronavirus pandemic.
"After the stock market crashed in March," says Crowe, "investors started flocking toward opportunity zone funds. In September, Novogradac reported that funds going into opportunity zones have nearly doubled since January."
Crowe points out two things that made opportunity zones more appealing post-outbreak:
- Holding periods of at least 10 years would be more than enough to ride out any market volatility along the way.
- Lower rates of return on all investments in a coronavirus world made the slightly lower rates typically offered in opportunity zones more appealing.
Crowe isn't sure if this trend will hold in 2021. A recovering CRE market may make opportunity zones less appealing, and tax benefits decrease each year.
"At the same time, there are still monumental tax benefits for real estate investors in qualified opportunity zones, but investors should still look for quality deals with proven developers rather than chase a risky bet simply for the tax advantages.
Our experts say evictions and housing reform will be big in 2021
Aly Yale predicted last year that we'd see widespread rent control efforts in 2020. "Fortunately for investors," she says, "that didn't quite come to fruition. While some individual cities took aim at rising rents (hello, Portland, Maine), we saw little movement [at the state level]."
Yale points out that both California and Sacramento voters struck down rent control bills despite having some of the highest rents in the country.
But that doesn't mean that rental investors aren't facing problems.
"COVID-19 hit renters hard, and with eviction moratoriums across the country, many landlords were (and still are) left high and dry on rent."
"According to data from RealPage (NASDAQ: RP), on-time rent payments are down 9% in Portland, 6.7% in Seattle, and 5.8% in Los Angeles. Expiring eviction moratoria at the end of the year may finally give landlords some options with these tenants, but with a new administration on its way into the White House, there's no telling. We could see additional protections enacted pretty quickly once Jan. 20 rolls around."
Yale suggests that offering digital payment solutions may help landlords collect on rent, an idea mirrored by the results in our study of whether landlords know what renters want.
COVID and rental rates will continue to make things hard for rental investors
Liz Brumer-Smith had high hopes for affordable housing solutions in the private market for 2020. "It seemed more real estate hedge fund and investment groups were putting forth efforts to provide affordable housing in the marketplace, and while my predictions weren't exactly wrong, 2020 didn't bring the solutions I was hoping for."
According to Brumer-Smith, low-wage workers have faced a doubly difficult year: not only have they been disproportionately affected by the pandemic, but affordable housing just isn't a priority for new developments. That leaves these workers with few options.
"Experts are predicting increases in evictions and unemployment rates as eviction moratoriums expire and the pandemic makes a second wave through the country."
Brumer-Smith agrees with Aly Yale that governmental rent control doesn't seem to be forthcoming. And that could further damage the rental market.
"Rental rates across the board have flattened or declined because of decreased demand for rental housing. Lower rental rates are great, particularly in high-cost markets like New York City, Seattle, and Portland, but that isn't a long-term solution for the affordable housing crisis. When rental demand returns, increased rental rates will return [as well]."
"Opportunity zones continue to be a great solution for the affordable housing crisis, but the efficacy and profitability of the projects are still unknown as many have experienced temporary delays or are still in the process of being completed."
Ripples in mortgage-backed securities
While housing reform, rent control, and tenant protection are great for addressing the housing crisis, one of our investor respondents pointed out that "[i]f more tenant/homeowner protections are extended or added, I expect some serious trouble in the world of mortgage-backed securities."
Our experts think venture capital opportunities could be big in 2021
At the end of 2019, Deidre Woollard "thought nothing could stop the flood of venture capital (VC) money into real estate."
"Clearly I was wrong," she told us.
"For at least three months of 2020, VC funding was nearly at a standstill. While I did say that venture capitalists would become more cautious, I missed just how cautious by a country mile."
2020's pandemic, however, emphasized the importance of real estate technology.
"When you can't get into a building, data-based decision-making isn't just a nice-to-have; it's essential. I did get it right when I mentioned that virtual and self-guided tours would become more a part of the leasing and buying experience. I had no idea just how much more time we'd all spend looking at real estate in 2020."
Woollard says it's no surprise that sites like Zillow (NASDAQ: Z) (NASDAQ:ZG) hit record-high traffic this year.
"Venture capital did get off the sidelines as fall started. Camber Creek, a VC firm that invests in real estate, announced a $155 million fund to invest in real estate tech companies. With Opendoor coming to market via SPAC (who knew that would be a hot buzzword in 2020?) and Airbnb going public, big money is pouring into real estate once again."
"Even SoftBank's Vision Fund, which was licking its wounds after the WeWork debacle, was back in action as part of a $700 million investment in REEF Technology, a start-up that remakes parking lots," says Woollard.
"Look for a lot more big funding rounds to hit next year."
Expect lots of changes in 2021
2020 was a rollercoaster of a year for everyone. In the midst of the retail collapse, we've seen a huge rise in real estate technology. While unemployment hit a record high in almost every state, housing demand and prices stayed strong. Millions of people are in financial distress, but mortgage rates are staying near a record low.
We learned last year that predictions based on past performance can be upended in a matter of weeks. But based on what we learned in 2020, and a great deal of experience in real estate investing, our readers and experts have come up with some solid predictions for this year.
If you're looking for more predictions, check out what our pros forecasted for 2021. We've got predictions on specific areas here:
- Property Tax Predictions for 2021
- Home Prices and Housing Market Predictions for 2021
- Multifamily Investing Predictions for 2021
- Commercial Real Estate Predictions for 2021
With a cautious eye toward risk, we believe that 2021 could be a great year for real estate investors on the lookout for great investment opportunities.