Real estate investing has changed dramatically in the past half decade. Platforms like EquityMultiple have flattened access to private commercial real estate in a whole new way, and self-directed investors can now participate in institutional CRE at relatively low minimums across a wide array of deal profiles.
Many industry watchers have wondered aloud over the past several years what would happen to the platform-based CRE investing space in the event of market turmoil. How would individual self-directed investors’ preferences shift in the event of a macroeconomic shock?
The outbreak of COVID-19 and its economic ramifications presents an interesting moment to assess the preferences of individual real estate investors. How have attitudes changed since the last economic crisis, and how are investors thinking about their alternative asset portfolio construction in light of the challenges and opportunities presented by the pandemic? We conducted a survey of hundreds of accredited investors to better understand how objectives and preferences have shifted over this past, most eventful year. We conducted this survey for two main reasons:
- To present you with timely insights and help you understand how fellow investors are adapting to the times.
- To better curate our deal flow to present investors like you with offerings that are compelling.
Hundreds of accredited, self-directed investors within EquityMultiple’s network responded to this survey, yielding robust insights. As always, if you have questions or further feedback, please feel free to reach out to ir@equitymultiple.com
Key Takeaways
- Investors are more intent on investing in real estate going forward than they were prior to the pandemic.
- Among commercial real estate asset classes, investors are overwhelmingly focused on multifamily, last-mile industrial, and niche asset classes like self-storage, indicating a preference for recession-resistant assets.
- Real estate crowdfunding is now overwhelmingly the preferred channel for real estate investing among this cohort of self-directed investors.
What types of CRE investments are appealing now?
We find ourselves in a wildly different real estate investing landscape than we experienced in the months leading up to March, 2020. Demand dislocations, shutdowns, and paradigm shifts in consumption and the nature of work have put heavy headwinds in front of some asset classes while presenting immediate opportunity in other real estate sectors.
We asked survey respondents to rank the property types that appeal most as of March, 2021, as the vaccine rollout continues rapidly and the economy appears poised for recovery. The options:
- Multifamily
- Industrial (including warehouses, fulfillment centers, and last-mile)
- Niche property types (e.g. data centers, and self-storage)
- Any property type with a strong sponsor and compelling market fundamentals
- Office
- Retail (anchored by essential goods and services)
The survey response data reveals a substantial preference for multifamily assets, scoring over 25% higher by weighted-preference than industrial, the next most-preferred CRE asset class.
Nearly 60% of the self-directed accredited investors surveyed ranked multifamily first among these options.
This sentiment aligns with our present origination philosophy and is substantiated by historical performance. Multifamily has outperformed other assets within and outside of CRE during prior downturns. This tends to hold true for one fundamental reason: people always need a place to live. Also, multifamily tenant bases tend to be diverse, with more units on average per property, allowing operators to adapt to market conditions and mitigate vacancy risk.
That said, it is quite possible the economic fallout from COVID-19 is largely behind us. As of the end of March, the unemployment rate has dropped to 6%, the lowest rate since before the pandemic, and the economy added over 900,000 jobs in March. Multifamily markets across the U.S. still benefit from the durable trends that characterized the pre-pandemic years: historically low rates of home ownership; diversifying economies across the “smile state” metros; and widespread shortfall of affordable, middle-income housing for the millennial workforce. There could be yet another wave of the virus that compromises economic recovery, or perhaps inflation will challenge supply chains and consumers in the coming months. No matter the shape and length of the recovery, multifamily may well turn out to be the surest bet going forward.
Respondents also indicated strong demand for Industrial and other niche property types (such as data center and self-storage). These results seem to track with the changes in society and the workplace accelerated by the pandemic. E-commerce continues to capture market share, remote work will capture a greater share of the workforce, and niche property types and models will emerge to meet shifts in demand. In this survey and elsewhere we observe demand for “remote-proof” assets such as self-storage, data centers, assisted living facilities, or medical office buildings. No matter how prevalent e-commerce or remote work become, people will always need in-person medical care and places to store excess possessions.
Among these niche or emerging property types, investors ranked preferences as follows:
| Asset Type | Percentage of Investors Interested, Post-Pandemic | Investment Thesis |
| Data center | 72% | Greater throughput needed as a result of e-commerce, remote work, and adoption of connected technology. In other words, the demands of the internet and cloud computing will inexorably grow. |
| Self-storage | 71% | Low operational cost, persistently low rates of homeownership (and hence greater demand for storage space), and a trend of baby boomers “right-sizing” their living arrangements to be closer to family and/or amenities. |
| Medical office building | 58% | Growing demand for outpatient care, preference for convenient medical services, and the essential nature of the underlying use. |
| Assisted living facility | 54% | An aging population and large cohorts of older adults needing around-the-clock care. |
What Types of Deals Look Good Now?
Aside from property types, what other attributes of deals are top-of-mind now? Responses indicated a wide range of objectives, reflecting the diverse investing mindsets of our nationwide investor network. For the most part, investors are not approaching real estate portfolio construction too differently now versus pre-COVID. Responses indicate a slight shift toward current cash flow and away from more opportunistic forms of CRE investing.
Payment priority vs. upside
The majority of investors surveyed had unchanged attitudes toward the degree of payment priority (downside protection) and upside potential of private real estate investments: 66% of investors stated the same level of emphasis on payment priority pre-pandemic versus now, and 75% of investors stated the same demand for upside potential pre-pandemic versus now.
30% of investors surveyed stated that payment priority is now more important going forward, as compared with just 4% who stated payment priority is now less important to them.
18% of investors surveyed stated that upside potential is now more important going forward, as compared with just 8% who stated that upside potential is now less important to them.
What about weighting payment priority versus upside potential? The stated relative preference of investors breaks down as follows:
- In pre-pandemic times:
- 26% said payment priority was more important than upside potential.
- 32% said upside potential and payment priority were of equal importance.
- 42% said upside potential was more important than payment priority.
- As of March 2021 and going forward:
- 30% say payment priority is more important than upside potential.
- 33% say upside potential and payment priority are equally important.
- 37% say upside potential is more important than payment priority.
In sum, the advent of COVID-19 has not dramatically shifted preference among accredited investors with respect to risk tolerance and appetite for upside. These results do show, however, a clear shift toward demand for payment priority.
We have heard this sentiment expressed anecdotally over the past several months, such as from a Utah-based investor with over $400k invested on EquityMultiple: “The pandemic hasn’t really impacted my risk tolerance or strategy, but if anything I’m a bit more inclined to look at a debt or preferred equity investment that offers some downside protection.”
Distressed Assets, Funds, & Opportunity Zones
While the worst of the economic fallout is (hopefully) behind us, the pandemic has undoubtedly shaken up asset prices and created uncertainty. Some investors in our network have taken an active interest in distressed assets — while the economic pain caused by the pandemic will hopefully be short-lived, temporary rent collection challenges or business stoppages have created pockets of opportunity. Other investors may double down on private fund structures, looking to insulate against too much exposure to any one asset or market. At the same time, a new administration has hinted at revamping the Opportunity Zone program. In our survey we explored investor attitudes toward these specific types of private commercial real estate investment.
For all three types of investment, a majority of respondents were either “somewhat interested” or “very interested” — rating the type of investment 6 or higher on a 10-point scale. Opportunity Zone investments indicated the widest spread of interest level, and Funds showed the highest proportion of interested investors, with 70% rating this type of investment at a 6 or higher.
Distressed opportunities showed the highest proportion of “very interested” investors with 23% of respondents rating their enthusiasm for distressed opportunities as a 9 or a 10.
| Distressed Asset Opportunities | Opportunity Zones | Private CRE Funds | |
| Very Interested | 23% | 21% | 21% |
| Somewhat Interested | 39% | 33% | 49% |
| Ambivalent | 20% | 28% | 20% |
| Uninterested | 17% | 17% | 10% |
We closed our survey by asking investors for any other unstructured feedback on deal flow and types of investments opportunities that would be most appealing in the moment. Some recurring themes as far as added investment types:
- International opportunities
- Expansion into other structures of real estate investments, such as debt funds
- Exploration of other types of alternative investments
This should be an exciting year for real estate markets and for EquityMultiple investors, as the economy emerges from a brief, acute slump and pent-up demand is released. As always, we appreciate feedback from our investor network and will use this input to better curate our deal flow going forward.
