How Is Remote Work Reshaping Private Real Estate?

Key Takeaways

Since the start of the COVID-19 pandemic, investments in U.S. private real estate have shown a marked shift away from office properties and into industrial projects, especially warehouses.
While investments in the largest markets have held steady, Chicago and some mid-sized metropolitan areas have seen substantial increases in private real estate inflows since the beginning of 2020.
Modest investments in Bay Area real estate stand in sharp contrast to the impressive returns reported by venture capital funds.

The COVID-19 pandemic has upended traditional work arrangements, and with it, America’s economic geography. In 2020, the Burgiss Applied Research team discussed some of the implications of this shift for private markets. Now, with the advantage of time and additional data, we are revisiting our early predictions about private real estate and will be touching on some new implications for venture capital in future work.

Real Estate

The Burgiss Manager Universe (BMU) contains nearly 12,100 funds and funds of funds and represents over $9.3 trillion in capitalization, providing transparency into private capital funds and their holdings. In this blog post, we focus on U.S. real estate, using data on more than 10,600 investments into 2,100 unique properties; these investments were made by 260 closed-end private capital funds from 2019 through 2021. Prior to the pandemic, the BMU dataset for U.S. real estate investment included a diverse assortment of property types, as shown in figure 1. Residential and office properties received the largest shares, with modest allocations to industrial and retail properties. As millions of employees shifted from working in offices to working from home in 2020, real estate demand shifted with them. Since the start of 2020, the proportion of real estate investment flowing into offices has fallen dramatically, dropping by nearly 40%. Perhaps surprisingly, the residential sector was not a beneficiary of this reallocation. Instead, industrial properties saw the largest increase in investments, nearly quadrupling their share from 5% to 19%, with robust growth in warehouses, logistics, and research and development facilities. While stories abound of real estate funds scooping up all of the available single-family homes on the market, we have found little evidence to support these claims. Investment in single-family homes rose incrementally in 2020 and 2021, but single-family homes still constitute less than 12% of all residential investment (4% of all private real estate investment). The vast majority of private real estate investment remains targeted at multi-family housing.

Work-from-home arrangements changed the appeal of certain property types, and figure 2 illustrates that these arrangements also had implications for which real estate markets attracted investment. In 2019, New York, Los Angeles, and Washington, D.C., were the three metropolitan areas that received the most real estate investment from closed-end private capital funds. Since the beginning of 2020, annual investment into New York and Los Angeles has remained essentially unchanged. In contrast, inflows to the Washington, D.C., area have dropped significantly—D.C. is now in line with Boston and Chicago in terms of total dollars invested. In 2019, office projects were the biggest investment recipients in both Los Angeles and Washington, D.C.; now, the bulk of investments have shifted to industrial buildings in Los Angeles and residential buildings in Washington, D.C. In contrast, New York-area residential properties have consistently held the interest of GPs prior to and throughout the pandemic, exceeding office projects by nearly two-to-one.

Compare the largest property types between 2019 and 2020–present.

Desktop: Hover your mouse over the map to view the different time periods.
Mobile: Touch the map with your finger to change the map from 2019 to 2020–present. To switch back to the 2019 map, refresh the page.

Fig. 2: U.S. real estate investment by private capital funds. A circle’s size denotes the annualized value of investments into a metropolitan area. Colors correspond to the property type receiving the largest share of investment dollars. City coordinates courtesy of SimpleMaps.com.

Other notable developments include the rise of private real estate investment into mid-sized metropolitan areas such as Boston, Las Vegas, and Miami. While they remain a small share of the U.S. private real estate market, their growth is in stark contrast to the stasis or outright contraction in the largest real estate markets. Chicago is the only large market where we have seen significant growth in private real estate inflows, though this likely reflects an increase in investment into distressed properties. On the other hand, the slight contraction in Bay Area real estate investment appears at odds with the recent returns reported by venture capital funds—more on this in forthcoming research.

Conclusion

The sudden rise of remote work has reshaped the economy in many ways, and private real estate was not immune. Real estate managers have had to adapt to shifts in demand along multiple dimensions, including property type and geography. For the most part, that has meant a reallocation from offices to industrial properties, and an influx of capital into some mid-sized metropolitan areas like Boston, Las Vegas, and Miami. In future research, the Burgiss Applied Research team will investigate how venture capital has responded to these dynamics.

Ruby AtwalJuly 18, 2022