The coronavirus pandemic accelerated trends that were already underway in the real estate market. Most notably, the move to remote work has had a tremendous impact on what sort of properties people are interested in and where those properties are found.
Obviously, properties that lend themselves to working from home (WFH) have experienced growth, but what exactly is a property that lends itself to remote work?
Where can those properties be found?
And if your property doesn’t appear to lend itself to remote work, what changes should you make?
Let’s dig into these three important questions.
Demand for Office Space is on the Decline
Remote work is making its presence known loud and clear. According to the New York Times, Midtown and Lower Manhattan, the US’s biggest central business districts, currently have 16.4% of their office space available for lease. This figure is higher than comparative vacancy rates after crises such as 9/11 and the 2008 Great Recession.
This trend isn’t expected to abate, even as coronavirus vaccines become widely available. Companies nationwide aren’t expecting employees to return full-time to the office, although many don’t expect to work from home 100% of the time either.
When Buffer, a social media analytics company, surveyed 2,300 remote workers, 97.6% said they would like to work remotely, at least some of the time, for the rest of their careers.
While remote work still has plenty of kinks to work out, like work/life balance and loneliness, 97% of respondents to Buffer’s survey also said they would recommend remote work to others.
At the same time, theorists posit that the increased creativity, innovation, and productivity associated with shared workspaces, and particularly in urban areas, will create a floor for the vacancy crisis.
Re-Framing Existing Properties As Accommodating to Remote Work
One trend in real estate investment is writing rental listings that reframe homes that weren’t explicitly designed with remote work as capable of accommodating remote work. After all, not everyone can afford improvements that add value to rental properties.
And, in the case of many real estate investment strategies, investing significant dollars into improvements could drastically lower the cash-on-cash return and worsen the cap rate.
Some ideas to consider.
- Market a three-bedroom apartment as a two-bedroom apartment with a dedicated office space.
- Advertise dens, large walk-in closets, accessory dwelling units, and extra-big hallways as opportunities for offices.
- Promote studio apartments and open floor plans as providing ample room for desks and office chairs.
- Extra space and a backyard can also be an opportunity for exercising or home gyms.
- Consider flyering or dropping off listings at businesses or areas where employers offer work from home opportunities.
Investing in Suburbs, Exurbs, and Gateway Cities
Remote work means people who want to move from the city have less holding them back. This has accelerated the trend of moving to the suburbs and exurbs. To take advantage of this, you may even want to consider investing in gateway cities, which are known as such because they were once considered gateways to the American dream but ended up lagging behind when the industries that drove their economies left.
Gateway cities are excellent opportunities to purchase below market value properties in regions primed for reinvigoration. Gateway cities tend to already have transportation infrastructure, healthcare and education, and are often found within driving distance of major metropolitan areas.
Running a Business Out of a Rental Property
Remote work has inspired many to run businesses out of their rental properties. And why not? It’s just like remote work except you’re working for yourself! For a property manager, allowing a tenant to run a business out of a rental property poses both liabilities and opportunities.
There’s added wear and tear and risk from the added activity on the property. At the same time, allowing a tenant to run a business out of their rental property can be as appealing to an existing or prospective tenant as being able to have a pet.
And, like a pet, liability insurance paid for by the tenant as well as a questionnaire that prohibits particular types of businesses can provide an opportunity for investors without compromising their investment.
The Most WFH Friendly States
The National Association of Realtors (NAR) conducted a survey of 3,142 counties in the US to evaluate their compatibility with working from home based on several factors.
- Home Affordability
- Internet Connectivity
- Percentage of Workers in Office-Related Jobs
- Population Growth.
NAR narrowed down their results to six states.
- North Carolina
Texas and Georgia are two of the most landlord-friendly states and that Colorado is one of the states with no property taxes. The top five counties were, notably, all within an hour of populous urban areas.
- Forsyth County, Georgia
- Douglas County, Colorado
- Los Alamos County, New Mexico
- Collin County, Texas
- Loudon County, Va.
Remote Work Changes Real Estate Investing Too
The prediction for 2021 was that the real estate market would remain a strong sellers’ market because of high demand, low inventory, and low-interest rates. Predictions about the strength of the market, however, were predicated upon how well managed the coronavirus pandemic would be managed.
At the Biden Administration’s current rate of vaccination, 2.8 million doses daily as of March 30th, 2021, all US adults can be vaccinated by the 4th of July 2021. At the same time, the monumental 1.9 trillion dollar American Rescue Plan will provide much-needed economic relief to struggling landlords, tenants, and more.
With a strong sellers’ market, expect remote work to continue to change real estate investing. Self-showings were just the beginning! With all the tools available to real estate investors, even labor-intensive strategies like selling homes using assignment on contract (wholesaling) can be done remotely.
And with so much investment activity being driven by the move to exurbs and suburbs, 1031-Exchanges may find themselves on the rise as investors hope to diversify their portfolios without paying capital gains taxes and depreciation recapture.
Bottom Line on Remote
The impact of remote work on real estate portfolios cannot be overstated. The freedom that comes with working from home has inspired people to leave cities for suburbs and exurbs, with real estate investors seeking out WFH-friendly properties or re-framing existing properties as accommodating to remote work. New markets are experiencing strong growth, and even the real estate investment industry itself is being transformed.
It’s easy to get caught up in all the excitement, so don’t forget to document all your research and other investment activities so that your real estate business qualifies for the 20% qualified business income deduction and you can take advantage of all the income tax deductions.