My 5 Intuitions Surrounding Investing in 2020

[William Robison]

With a professional career in real estate investment and management in the small investor space, I have had the privilege to witness many pivots to the industry. I have seen economic busts and impacts. I currently managed over $50M in real estate property management assets with dozens and dozens of clients. I have been involved in several hundred transactions of small, usually SFR, real estate transactions over the last 16 years. This is a short run list on why I believe I can share MY expectations of real estate in 2020. This is NOT designed to be about COVID-19, but it is the news story of the year and plays an important role in the conversation. All of this experience has come from the Kansas City, MO market area, but the insights are likely similar across many middle markets, and potentially beyond.

So, MY 5 Intuitions of Real Estate in 2020

C class is prime for a spike -
C class is prime for a spike because of economic fear.  Many millions of people have been impacted by the pandemic economically.  Many of them have witnessed or weathered 2008.  In the years since 2008, there has been a very steady growth of comfort surrounding stability and the expectation of economic safety.  The paycheck to paycheck class has gathered confidence over more than a decade that they could comfortably afford more and more.  With the immediate impacts of the pandemic, that realization immediately vanished.  Statistically speaking, we have a very strong leasing season in the "middle" (Kansas City is in the middle of America).  Our season typically starts in late February, gathers tremendous strength through the spring and into early summer.  This year, during the stay at home orders, we have seen a significant increase in the number of inquiries for class C properties.  In fact, we are currently receiving 5 leads for C class for every one lead for A/B class.  We also have more A/B class properties managed and available currently than C.  So, my intuition is that C class will continue to be in high demand for a few years as people determine their new economic realities.  Well managed C class is prime for strong years ahead.  More about A/B later....

SFR investing will be more important than MFH -- Think social distancing. Think millennials raising families. Fenced yards, green grass, and fresh air, and maybe cheap gas. Over the half decade (longer in some markets) we have seen a surge in MFH construction in downtown areas. A resurgence, even much needed, to bring residents to the center of life, action, work, and play designed around inner neighborhoods. The millennial surge created significant markets, many prime with increasingly strong, disposable incomes. Those same 20-somethings +/-, are turning 30, getting married, having children, and....moving back to suburbia. We dont have statistics on this, but intuitively, we are seeing a measurable increase in the number of applicants moving to our suburban neighborhoods. Some of this is for the fenced yards, green grass, fresh air, but a lot of it also revolves around the school systems. Not unlike many Secondary markets in the country, KC has a struggling school system in the middle and the decades strong suburban schools continue to thrive and flourish. Back to the point surrounding social distancing. With a great need for space and desire to share anything together at the moment with a stranger, the same lies true with housing. Many multifamily residents are seeking refuge of "safety" in an SFR, regardless of the location. This pandemic marketing season has been very strong for our SFR class, with slower traction on our few MFH listings. Personally, my downtown dwelling, millennial child, has a career now in a primary market, A class MFH community and lives in another. Both buildings have a case of COVID and these are very concerning to this 20-something.

Real Estate will see minimal impact from this recession -- Lets face it, 2008 was caused by the real estate (mortgage) industry.  The mortgage melt down and the resulting real estate crash were the effects of the very cause.  In 2020, we will see a recession from this pandemic, but I believe that very little will impact real estate.  Will there be foreclosures, most definitely, but nothing close to the scale of 2008.  Further, the stimulus provided for this event is substantially stronger than the stimulus provided to prop up the economy in 2008.  Between a lack of cause and the economic prop, I believe that real estate will see very little overall impact.  Sales are significantly down in terms of numbers, but that is not being reflected in sales price, only volume.  In fact, there are more buyers for the limited inventory, which in other years would indicate appreciation.  Without a big history lesson, we are due for a small correction, but not necessarily a large recession.  Will there be opportunities?  Probably, but not in vast numbers, IMHO.  Will we all lose years of appreciation?  Unlikely.  More on this topic in the next.

A/B Class will see significant stability -- Each marketing cycle, it is typical for a reasonable range of residents to buy a house instead of continuing to rent.  Interest rates are designed to be significantly low as a result of the pandemic, but to obtain a loan in the current environment, has become substantially more difficult.  Some of the nations largest lenders have sharply tightened standards.  Some requiring 20% down and 700+ credit scores.  This will limit the number of tenant class that will be able to purchase, some for years to come.  Other constraints come from a limited supply as fewer sellers are willing to allow in person showings of their homes, and therefore, are choosing to stay in place longer.  Because of these constraints and the fear of the market that will likely last fresh in our minds for a few years, I believe there will be fewer A/B class residents buying houses over the next few years, which will continue to support the current inventory of this class.  

Biggest Winners/Biggest Losers -- As always, sideline investors regret sidelining opportunity.  Be smart, be safe, but be investors.  As mentioned, I believe that MFH will see a slowing impact from this market.  I believe that the SFR class, formulated around upgraded and well maintained assets, will flourish for several years to come. Many would be homeowners will be looking for more "home" and less "house.

Always open for conversation.  Share your thoughts and ask questions.  My goal from my 7 years on BP is to help educate where I can, within the constraints of managing our real estate company.  Be well, be wise.