It is still early to gauge how COVID-19 may shift regional or geographic investment strategies. There is a lot of speculation as to whether the pandemic may cause investors to view gateway markets more negatively due to the contagion hot spots that have emerged in urban centers.
“There has not been enough time to say that there has been a sustained shift, but I would say that generally amongst managers we are starting to see more interest for suburban buildings and low-rise buildings than we have in the past, and there is certainly more concern being expressed about high-rise buildings in a dense CBD,” says McMillan.
Survey results show that HNWIs continue to favor primary markets with 60 percent who said that had a strong or extreme preference for multifamily markets, 38 percent for secondary markets and 11 percent for tertiary markets.
If anything, COVID-19 may have heightened the attention to dynamics and drivers within individual markets. “We’re getting a lot more questions from investors about why we’re selecting the markets we’re selecting, and what impact those markets have felt from COVID-19,” says Huffman. In addition, HNWI are biased by their own experience with COVID-19 and where they live.
For example, some investors in Atlanta are seeing the suburbs benefit from people who are coming to the area from other big cities, while at the same time investors in the Northeast are seeing people leaving New York City in favor of smaller towns in Connecticut or Vermont, and they’re trying to figure out how to capitalize on those trends, he says.
Certainly, the current market is creating new challenges and opportunities for those entities looking to raise capital from the HNWI market. Some HNWIs have moved to the sidelines as they wait to see how things play out in the second half of the year before committing any new capital. “It has caused a temporary pause given lack of price discovery in markets and tightening lending terms. But that pause is not likely to last as the risks of the pandemic are better understood,” wrote one survey respondent.
When asked what events are likely to have the greatest negative impact on HNWIs’ allocations to real estate, 52 percent said a prolonged recession, followed by a change in the tax code at 42 percent, real estate downturn at 41 percent and an increase in interest rates at 35 percent.
One of the persistent frustrations for investment advisors and private equity fund managers raising capital is access to HNWIs. Additionally, the current environment does pose an added challenge with some investors who are concerned about the prospect of prolonged economic stagnation.
On the flip side, there is potential opportunity for investors to line up for investment in early entry point opportunities in the recovery.
“Given the current state of COVID-19, investors are seeking low volatility quality properties and preservation of capital. Seller are still looking for transparency on where the economy and real estate market is heading. The opportunity is interest rates are still very low and there are great opportunities out there,” wrote one respondent.