Remember, it’s the punch you Do Not see coming that knocks you out…
It is no secret that in Seattle and the greater Puget Sound, real estate has been a major success story over the past 10 years. With near continuous appreciation throughout the last decade, it has felt as though Puget Sound real estate could do no wrong.
In fact, it seemed like the only thing that would destabilize the Seattle real estate market would be something that was catastrophic, like an earthquake. No one predicted that the event would be a pandemic. Not only will the pandemic have major global impacts, but the epicenter for Coronavirus in the United States is here in Seattle. We are all asking ourselves, “What will be the impact be to our local real estate market?” We, like everyone else, are not entirely sure yet, but here are a few observations thus far.
Hospitality and tourism are being hit the hardest. Target occupancy for Seattle hotels is typically 80% for this time of year. Currently, all restaurants have been closed in our state, sans take-out and curbside delivery.
Multifamily renters who are unable to work remotely, or those who work in the service sector or “gig” economy, are beginning to feel the financial strain due to declining income. The Seattle City Council has currently banned evictions for non-payment of rent, although the missed rent will be due at the end of the ban. This shifts financial exposure from the tenants to the property owners.
Buyers of commercial real estate from outside the area are wary of travelling to Seattle to tour and inspect properties. This reduces a buyer pool that contributed, in large part, to the appreciation the Seattle market has experienced as new capital flowed into the city.
It is likely that assisted living and senior care properties will be met with more regulatory scrutiny due to their susceptibility to viruses like COVID-19. This could dramatically increase operating costs moving forward.
Other asset classes, such as equities (stocks) have been very reactive to the pandemic and that tends to cause alarm. When suitable, we firmly believe that real estate is an asset class that warrants an allocation in most investor’s portfolio. So, what takeaways are there for investors looking to protect their investments during this period of uncertainty?
Protecting Investment Real Estate
Diversification is key when focusing on preservation of capital. Within real estate, different geographic locations and different property types, serving different business sectors, behave differently in major events and market cycles. Following are examples of these premises as it relates to Coronavirus:
- Warm states in the South are experiencing lower instances of Coronavirus due to their climate (Arizona has 18 known cases as compared to Washington’s 769 known cases).
- Not all retail will be affected in the same way. Grocery stores, pharmacies, and drug stores may have record-setting sales during this time period. Retail that has a developed online presence will capitalize on that as people are practicing social distancing. Bricks and mortar stores that sell non-essential products will struggle the most and may opt to close temporarily
As of right now, we are still very bullish on Seattle’s long-term real estate prospects, however, we believe that too much concentration in any one market/market sector puts preservation of capital at risk. Investment property owners who are entirely concentrated in one property type, in one geographic area, such as multi-family rental property in the Puget Sound, should strongly consider diversifying a portion of their portfolio, if they prioritize preservation of capital. Younger investors may have the investment time horizon and risk appetite to be concentrated, but unless you are comfortable weathering a full market cycle (historically, real estate cycles occur every 7+ years), then diversification is essential.
Our clients regularly ask our opinion regarding how much room there is left for the region’s real estate to appreciate. Here are some points to consider:
- Seattle is still more affordable than San Francisco
- Seattle has a highly educated labor force earning high incomes
- Our major employers are growing, leading to a major expansion of commercial office and a net migration of residents into the city
- Record new multifamily and commercial office expansion continue to be met with record high absorption and leasing
We all hope that the pressures of the Coronavirus are short-lived and that we can swiftly address COVID-19 on both a local and global level. In the meantime, investment property owners should consider their property and decide if they have the holding power, and will, to ride a real estate cycle, should our market turn. Remember, it is the punch you do not see coming that knocks you out.
If you do feel that now might be a good time to sell your investment property and have questions regarding your tax-deferral options and 1031 Exchanges, contact us to schedule a complimentary 1031 Consultation. Our consultations can be done over the phone, via web conference, or in person at our offices located in Mercer Island, WA and in Portland, OR. To schedule your free consultation, simply call 206-686-2211 or CLICK HERE.
Austin Bowlin, CPA – Partner of Real Estate Transition Solutions, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. To reach Austin, call 206-686-2201 or email firstname.lastname@example.org.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Past performance and forecasts are not indicative of future results and should not be relied upon.
There are risks associated with investing in real estate properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Real Estate Transition Solutions is independent of CIS and CAM.