Three ways real estate investing will change in a post-pandemic future
If there’s one sector that could be forever changed by COVID-19, it’s real estate. Whether it’s the increase in remote work or wave after wave of lockdowns, people’s ideas about where and how they should live have shifted. In many cases, this has driven a mass exodus out of claustrophobic downtown high-rises and into the spacious neighbourhoods of suburbia.
While some might assume this trend is limited to home ownership, about 30% of the population rents — and many of them are also experiencing this change in perspective. Jason Jogia, chief investment officer at Avenue Living, a Calgary-based real estate and investment business, sees this happening across the many rental properties the company owns and operates.
“Internally, we are dubbing that the ‘flight to affordability’,” he says.
With more than 90% of Avenue Living’s assets in multi-family buildings, low density apartments, townhouses and mid-rises located in urban and rural corridors in Alberta, Saskatchewan and Manitoba, Jogia is in an ideal position to understand how the pandemic has impacted real estate — and how investors can capitalize on new opportunities.
The value of space
One of the biggest changes that Jogia has seen is a desire for space. After being cooped up in the same place for so long, an increasing number of people want to live somewhere with more room. Many want bigger backyards or green spaces where their families can play outside, while others want more room inside — a trend that is being referred to as ‘reverse urbanization’, says Jogia.
At the same time, people are more conscious of affordability, with job stability having become less certain. “People don’t want to live in a 500-square-foot condo at $3.50 a square foot when they can find a three-bedroom townhouse in the suburbs for much cheaper and with more square footage and green space,” he says.
In major urban centres, such as Toronto and Vancouver, finding a more affordable place with more room means living many kilometres outside of a city’s centre. In the Prairies where less expensive secondary markets are more common, locations with many city amenities can be found just a few kilometres outside of city centres.
“We are seeing an exodus from higher-priced, smaller-sized rentals because residents want space,” Jogia explains. “They’re moving farther out to get the exact same value that arguably in a market like Calgary we can probably provide one kilometre out of the downtown core, versus in Toronto, where you have to go 20 kilometres out of the core.”
Most of Avenue Living’s assets are from the 1980s and 1990s, which means their apartment sizes are much bigger than the majority of downtown high-rises, and also less expensive to rent. The company targets frontline and essential workers — those making $15 to $50 an hour — as tenants, and the company buys in places such as the Prairies where those hourly wages can go a longer way. Besides wanting value, its tenants are also looking for safety and security for themselves and their families.
“When we invest in older stock, we’re typically buying it well below replacement cost,” Jogia says. “We’re able to invest hard dollars into improvement and betterment, bringing properties up to a certain standard. Then we apply our proprietary management to them.”
New asset owners
Another change he’s seen is around real estate ownership. The massive generational wealth transfer between baby boomers and their children is opening up new opportunities. Much of this generation’s wealth resides in real estate, leaving the next generation with assets many don’t want to run. The one-off owner-operator model is slowly dying out, making way for companies that can satisfy today’s tenant needs, he says.
With more people at home, tenants are demanding better amenities, whether it’s parking, stronger Wi-Fi, more security cameras keeping an eye on people’s property or faster response times to fix issues. Small-scale multi-family operators don’t want to deal with the additional costs that go into providing better service.
For an investment firm like Avenue Living, that kind of change presents opportunities. The company focuses on properties it can update with capital improvements and leverages a shared-services platform that includes underwriting, legal, marketing and customer service to ensure operational efficiencies and provide a customer experience in line with what the market demands. It bought several new properties over the last year, adding $470 million in assets under management to its nearly $2-billion portfolio in 2020. Mid-way through 2021, its portfolio now exceeds $2.8 billion in assets.
Demand for non-correlated assets
There is a third trend that Jogia is seeing around real estate investment. High net-worth individuals and retail investors who work with advisors and portfolio managers want to own assets that are not correlated with the broader stock market — especially after the volatile year equities have had. At the same time, the potential for inflation seems to be making real estate a more attractive asset, as it has historically maintained or appreciated in value during inflationary periods.
However, buying into real estate has long been seen as an unapproachable investment. Purchasing shares in a real estate investment trust (REIT), which is on a stock exchange and can rise and fall with broader market trends, puts investors at the mercy of market fluctuations. Buying and operating a physical asset on their own brings with it different challenges, including limited liquidity, and the difficulty in managing property given today’s operating environment.
Avenue Living offers an alternative way to invest in real estate — where profitability is correlated to the fundamental performance of the underlying assets and investors are less exposed to market fluctuations. Investors have access to five funds, three of which hold low-density, multi-family units. Avenue Living’s flagship fund, the Avenue Living Real Estate Core Trust, invests in workforce housing throughout the Prairie provinces; the Avenue Living U.S. Real Estate Trust brings the same strategic investment model to secondary and tertiary markets to the central United States; and the Avenue Living Real Estate Opportunity Trust invests in underperforming multi-family, retail and industrial spaces and applies active management to improve the asset performance. In addition to these, investors also have access to the Avenue Living Agricultural Land Trust as well as the Mini Mall Storage Properties Trust.
As the pandemic drags on and there’s more and more talk of looming inflation, Avenue Living is staying the course, confident its investment model has the potential to provide a much-needed hedge for investors. “In our opinion, there is no better hedge to inflation than real property,” says Jogia.
A company like Avenue Living, which has been in the industry for more than 16 years, targets a growing user base that is happy to rent, which seems to be the kind of business investors want to hold these days.
“We’ve built a business around what’s already existing,” he explains, “and we’ve really managed to survive and thrive through three economic cycles, COVID being the latest one that tested us.”
While no one knows for sure what a post-pandemic future holds, Jogia feels confident that these trends, among others, will hold up. Even if people go back to the office, they may not go back full time, which means that desire for more space in a more attractive area outside of a city’s core will remain.
“These trends are going to be a part of our existence going forward,” says Jogia. “Tech has enabled a lifestyle shift, people have a desire to be at home, and that correlates into a greater value for space — and, in turn, more potential opportunities for investors. With a relentless focus on the customer experience coupled with our proven investment strategy, Avenue Living is situated for continued growth.”