Where to Invest in Real Estate Right Now: Housing, REITs, Commercial
What was supposed to be a year of clarity for the property market has instead given way to fresh uncertainty.
Stubbornly high mortgage rates are keeping buyers out of the house hunt. Potential sellers are staying put. Commercial property valuations, on the other hand, are still depressed amidst disagreements over the value of everything from office buildings to warehouse space.
Expectations were that September’s jumbo rate cut would shake the market loose, but no boom has emerged and mortgage rates have remained elevated. The election of Donald Trump brought mixed signals. Some in the real estate industry welcome his promises of deregulation and his real-estate background, while others fear the effects of an “America-first” policy on property — tariffs and an immigration crackdown — could lift costs for materials and labor. And all of that may feed through to rates.
“Rates will likely remain elevated until we get more clarity on specific policy implementation, particularly how serious the administration is about cutting government spending — which is always easier said than done — and precisely how aggressive the ‘mass deportation’ is effectuated,” says David Auerbach, chief investment officer at Hoya Capital Real Estate.
For a while, the mantra among commercial-property investors was “survive until 2025.” Now, that time has arrived with little relief on borrowing costs. Still, investors sitting on the sidelines since the Federal Reserve began raising rates in 2022 may be ready to act. And some major office and apartment landlords could be forced to start reacting to how drastically valuations have shifted in recent years.
In order to make sense of the market now and where’s it’s headed, Bloomberg News consulted with four real-estate experts who specialize in various aspects of the industry — from commercial to residential, REITs to short-term rentals — to help identify opportunities.
Suggestions varied. Some made the case for taking a realistic assessment of your needs and investing in residential property if you just can’t wait any longer. Others saw chances to take advantage of geographic disparities, snapping up bargains in places like San Francisco which have been beaten down in recent years.
We also asked our real estate pros two very specific questions. First, what do they think the incoming Trump administration will mean for the sector? And second, to give it all some levity, what investment would they make if they had $1 million to deploy for a passion project? Scroll on to see what they had to say.
Laura Mattia, financial adviser at Wealth Enhancement in Sarasota, Florida
Get Into the Housing Market
The idea: Buying a home now, even with higher interest rates, can still make sense depending on your personal situation and long-term goals. While mortgage rates are unlikely to fall back to the pandemic-era lows of 2.5%, real estate remains a strong long-term investment. Homes typically appreciate over time, and owning allows you to build equity instead of paying rent, which continues to rise in many areas. In fact, building equity in a home can be thought of as “prepaid rent” for later years when you are retired and no longer have an income but also no longer have a mortgage payment. In a sense it is another aspect of “saving for retirement.” There are also tax benefits, such as deductions for mortgage interest and property taxes and the ability to have more control over your lifestyle and space which should not be ignored. Lastly, if rates decrease later, you can refinance.
The strategy: Ideally buying a home in today’s market requires a thoughtful, long-term approach that starts with assessing your financial health to ensure you can afford the mortgage payments with higher current interest rates. It’s also important to account for other costs, such as closing fees, property taxes and maintenance. Focus on the long-term value by looking for strong growth potential, such as good schools, amenities and job markets. Even during uncertain markets, a well located property should appreciate over time. But the most important part of your strategy is to maintain patience, so you find the right property and to never allow emotions to dictate your decision.
The Trump factor: In terms of evaluating real estate as an asset class in light of the new administration, if inflation continues, it is important to know that inflation tends to be correlated with real estate. In other words inflation should increase your investment in real estate.
Alternate idea
If I had $1 million to invest in a property, assuming this is extra money just lying around, I would look for opportunities where people are selling due to emotional factors or hardship in a place I think would be fun to live. For example, after a natural disaster (such as the recent hurricanes in Florida), some homeowners may need to sell quickly due to damage to their property, financial strain or emotional toll. While it may sound opportunistic to take advantage of the distressed situations, buyers should pursue properties where the seller is actively looking to sell. Buyers should be mindful of ethical considerations since there’s a fine line between offering a fair solution and taking advantage.
Before purchasing, the buyer should fully evaluate their risk. Assess the extent of damage to determine if it is repairable or if there are structural issues. Consider the frequency of hurricanes and floods in the area and determine if you can better protect the property in the future. It might be as simple as purchasing insurance, or it could mean rebuilding up to code.
Lastly, while buying a home in a hurricane-affected region could present a bargain, you’ll want to evaluate whether the area is likely to recover and attract new buyers in the long term. Research local rebuilding efforts, infrastructure plans, and population trends. If the area is resilient and rebuilding efforts are strong, it may be a good investment, but if the region struggles to recover, it could take years for property values to return to pre-disaster levels.
Patrick Carlisle, chief market analyst, Compass
Make San Francisco’s Bust Your Next Boom
The idea: If you believe that San Francisco will bounce back, as it always has in the past, the downtown condo market offers the best residential deal opportunities in the Bay Area. It was hammered by the pandemic, work-from-home, social issues and the tsunami of doom-loop talk in the media in recent years. But it is filled with beautiful condo buildings with gorgeous units, offering top-line amenities and often stupendous views. Its median condo sales price is currently similar to what it was in 2017, not factoring in the high rate of inflation in recent years, so they are selling at enormous discounts, while other markets around the Bay Area have generally continued to appreciate substantially over that period. Eventually, downtown office leasing rates will be so attractive compared to what they were in the past, and compared to other markets. I believe that the office buildings will start to fill up again, which will cause a rebound in demand for the condos nearby. For commercial investors, the same applies, but even more so, for downtown office properties. They are now selling at astounding, fire-sale prices.
Though it became fashionable to predict the doom of the city, San Francisco is still one of the most beautiful, most educated, culturally rich, innovative and affluent cities in the country. San Francisco has always been more susceptible to boom and bust cycles than most markets, but in the past has always rebounded stronger than ever. During every bust — after the 1989 earthquake, the collapse of the dot-com bubble and then the subprime bubble, and recently with the effects of the pandemic, it has been predicted that SF will never recover, but then the wheel turns again. It is simply, despite its drawbacks and challenges, a wonderful place to live and work.
The strategy: Review the many purchase options in downtown San Francisco. Inventory is high. Take your time, identify properties that seem most appealing as a home or investment, and then start making very aggressive offers. Look for deals that make you want to bring out the champagne, that in future years, you’ll be bragging about to friends and colleagues.
Besides general market conditions, the time of year when buyers have the most leverage and can make the best deals in the SF real-estate market is during the mid-winter holiday slowdown running from Thanksgiving to mid-January.
The Trump factor: Foreign immigration and investment — especially from China and India — has been a huge dynamic in the San Francisco Bay Area market for a long time, especially during tech booms. The Bay Area has long been a magnet for the best and brightest around the world, and that has been a major factor in home price appreciation. San Francisco’s foreign-born population is about 35% of the total. (Santa Clara County’s percentage is 42%.) But if those immigrants don’t feel welcome or can’t get the necessary visas, then that affects the numbers relocating to or investing in the region, which affects the demand for real estate.
Also, the state and local tax (SALT) deduction limitations of the first Trump administration had a significant impact on the financials of owning a home in the Bay Area, and has been one factor in domestic migration to states with lower housing costs and state taxes. If those SALT tax limitations are repealed or adjusted to the benefit of California homeowners, that would benefit the market. Alternatively, if further punitive policies came into effect — since California has been a deep blue state for a long time — then that might increase out-migration and thus negatively impact housing demand.
Alternate idea
My buying scenario doesn’t really have anything to do with financial investment returns but an investment in quality of life. It’s more of a retirement daydream: to find someplace quiet, rural, safe, politically stable, with good weather, surrounded by beautiful country, with a friendly population, where a million dollars still goes a reasonably long way, and away from the nonstop stomach-churn of national and international politics. Ideally with good future prospects pertaining to possible effects of global warming. That’s a very big ask in the world today, but what comes to mind first would be a small town or village in the southern Peloponnese area of Greece near the coast, or perhaps in Crete or southern Portugal.
Rich Hill, head of real estate strategy and research, Cohen & Steers
Signs of Commercial Real Estate Revival
The idea: We’ve all heard concerns about commercial real estate in a post-pandemic world. But we think commercial is a very attractive part of a portfolio that is often overlooked. Everyone views commercial real estate as a singular asset class, but it’s really not. It’s 18 different subsectors that fall under a broad umbrella that can act differently at different points in time. Year-to-date, the best performing sectors of the real-estate investment-trust (REIT) index are healthcare real estate, office and regional malls. What’s more, a lot of people view commercial real estate as an “old economy” asset class because they think of things like office and retail. Well, guess what? Some 60% of the REIT index is what we consider to be “next generation property types,” things like data centers and cell towers and industrial warehouses.
We believe now is a good time to invest in commercial and that the listed REIT market is telling you that there is a recovery coming for commercial real estate more broadly. Listed public REITs are leading indicators in both downturns and recoveries historically. They help show the future for private real estate. Listed REITs troughed in October of 2023, despite all the headlines about how challenging commercial was. Believe it or not, listed REITs are up almost 40% since their trough. And now private valuations are troughing, if they haven’t already. We believe that they are poised to recover and that now is a good time to buy low.
The strategy: There are a lot of different ways to invest in commercial real estate. If you’re an everyday investor on the sidelines we think listed REITs are a really interesting way to get exposure. These are publicly traded companies that invest in real estate, bringing a fair amount of liquidity. I would start my research process with the industry group, the National Association of Real Estate Investment Trusts (NAREIT). You can go to reit.com and they provide a whole overview of how to value REITs, what the different types of sectors there are, what individual companies are out there and how they have performed over time.
Still, I want to be very clear. We joke that “the building doesn’t know what vehicle owns it.” I get asked all the time, do I like listed REITs or private funds better? I reject the premise of the question. What we’re really talking about are different types of liquidity and different risk and reward profiles.
The Trump factor: If you go back and look at what happened in the aftermath of the 2016 election, where interest rates rose for all the reasons that they’re sort of rising today, it wasn’t so bad for listed REITs. Right now, tariffs are getting a lot of attention. The good news for commercial real estate is that it is a domestically focused asset class. There is a scenario where slightly higher inflation is actually good for commercial real estate because net operating income growth and inflation are highly correlated together.
Alternate idea
I think solar panels are super interesting. The roofs of commercial buildings have a huge opportunity to add solar panels to them and either rent out the roofs to other people or sell energy back to the grid. I think it is going to be one of the biggest opportunities that no one’s talking about right now. We’re just in the early innings of landlords beginning to unlock that value.
Scott Trench, CEO, BiggerPockets
The Case for an Airbnb
The idea: An investment in a short-term rental (STR) such as an Airbnb is fundamentally an investment in real estate, but with the strategy of increasing cash flow over and above what is possible from a long-term rental. Given that, it’s important to find a property that first and foremost could make sense as a traditional long-term rental. But then you want to make sure there is a high probability of offering a large “spread” in terms of cash flow versus what you would make on a long-term rental.
The strategy: If you are set on investing in an STR, you would ideally look for something local to where you live for a way to use the dynamics of that market to your advantage. For example, many markets only allow short term rentals for owner-occupants. This is a huge advantage, which constricts supply and allows those who are willing to rent out their houses a “cheat code” for wealth creation.
One note: I make people mad when I say this, but I am incredibly skeptical and would strongly discourage most people from buying a vacation home in a mountain or beach town and thinking it will be a great investment. These communities are extremely adept at taking money from out-of-towners who think they are investing. Services like management, cleaning, and brokerage are all very expensive in many of these places. Further, vacation towns can be very volatile. In good economies, prices explode. In down economies, however, multiple factors can work against owners of STRs. Demand can fall. Competition can increase as other owners (not necessarily investors, but wealthy folks with second homes) list their properties to earn a little extra cash. Finally, owners who struggle financially may sell their properties, increasing inventory and reducing asset value.
The Trump factor: I continue to be bearish on interest rates (I believe that they will stay high), yet bullish on the long-term prospects of the US generally. High quality, cash flow positive, residential real estate is likely to perform well over long time horizons and through changing administrations. This stance is unchanged after the election, and would have been unchanged if election outcomes were different.
Alternate idea
I’d invest in a combination brewery and coffee shop. I love high-quality coffee and a great beer, and it would be fun to have two shops next door to one another with complementary hours. One of my favorite Denver-based breweries, called Seedstock, has a coffee shop next door with a very similar setup to what I envision. I think that doing this closer to where I live 30 minutes south of Denver could be really fun and would be a great way to plug into the local community on another level.