31.03.2020

The virus, the actions taken by the authorities to limit its spread, as well as the anticipated economic downturn, have brought enormous uncertainty into our lives. No one will predict how events will develop. But we can already argue that the economic consequences for many people and companies will be quite severe. What does this mean for the real estate market?

Mainly, the strengthening of the tendency towards sharing economy and reasonable savings that has been emerging over the past decade.

Commercial real estate like premises for restaurants, shops, entertainment complexes, beauty salons, is in decline, but storage facilities will remain in demand. Many companies had to go online.

So what real estate will be in special demand in the next few years?

1. Co-livings

Co-livings have been around on the market for some time, but it’s mostly old privately remodeled buildings. Often they violate the rules and restrictions provided by the city for this type of housing and redesigned with an emphasis on capacity rather than comfort.

Co-living

This type of housing as a whole will be in demand in the future, especially in times of economic downturn, but it will be higher-level co-livings. They will be built in compliance with the regulations, which will minimize risks and increase attractiveness for investors and owners, and with greater comfort, which should have a beneficial effect on the rotation of residents.

2. Housing with Medical Personnel

This type of housing includes nursing homes that have experienced a real boom in the United States before the crisis and will continue to be in demand after. But it is also possible that a new type of housing will emerge, for example, near hospitals, where patients who have recently been discharged from the hospital, their relatives, people in quarantine and so on, will be able to temporarily live and be under medical supervision.

Housing with Medical Personnel

On the one hand, such houses involve a large amount of operational activity and the presence of a fairly large number of personnel, on the other hand, residents are willing to pay bonuses for the opportunity to receive services that are not available when renting ordinary housing, starting from cleaning and ending with round-the-clock supervision of medical staff.

3. Multifunctional Real Estate

Such buildings may include, for example, a co-living and a co-working under one roof or more complex facilities where entertainment, services, restaurants, co-living and co-working are integrated. Who is the target audience? For example, relocated employees with access to the office and employees who came on a long business trip.

For short-term stays we already talked about Hotel Co-workings.

Co-working

To some extent, this idea has been implemented in modern apartment complexes, where there is a common space in which tenants can gather, hold events, work, and communicate. But renting such apartments is expensive.

A mix of co-living and co-working will be a more affordable option for budget tenants. For investors, the implementation of multifunctional projects will cost more and require experience and willingness to take risks, but rental income may be higher.

Pros and Cons of Multifunctional Buildings for Tenant, Owner and Investor

Tenant’s Perspective

For consumers, renting a property with a function is a way to reduce costs, it’s easier to organize your life, since the necessary services are already included in the lease, and at the same time maintain mobility, without being attached either legally or in everyday terms to one place for a long time.

Owner’s Perspective

For the owner, a property with a function is profitable due to the high rent received per square meter. Here the principle of “bought in bulk — sold in retail” works. Take co-working for example. Imagine that in one room there are 100 tables, each of which is for rent. Each of the tables costs less than renting your own small office. And the total income from their lease is several times higher than the cost of renting the entire room.

But whether the owner will receive a consistently high rental income depends on how well he can establish operational activities. Tenants do not sign long-term lease agreements, even for residential premises, and in the case of co-working, customer rotation becomes even more urgent problem — a person can take a place for one day, and tomorrow you need to look for a new one. 

Typically, operating companies or employees are hired for such buildings, the tasks of which are to attract new customers and retain existing ones. Marketing and advertising tools are used, which requires certain costs. It is believed that permanent employment of 70–80% of places is a good result. Depreciation of furniture and equipment is another expense item. All this must be taken into account when forecasting profitability.

Ivestor’s Perspective

Profitability for an investor consists of three indicators: capitalization rate, percentage of occupancy of the premises and rent. The cost of renting a property with a function will always be higher than without it, but the capitalization rate will also be higher, since there are more management costs and risks. 

Profitability for each project is calculated separately: indicators will depend on the location, demand for such real estate, the cost of renting individual offices and housing, etc. For example, if the rental rate for an office in the region is low, then it makes no sense to build co-working, since the cost of its maintenance in any case, they will remain quite high and level out higher rental returns.

Typically, institutional investors are interested exclusively in profitability, and then the developer offers the project and shows the profitability, and the investor decides whether to enter it, and it does not matter what is being built. But there is another story that we are seeing more and more often: when investors are interested in creating a certain portfolio and come to the developer with a specific request. This is a profitable game of large numbers. The main buyers of such portfolios are insurance and pension funds.