While macros are unlikely to change, investors and lenders should take local people movement into consideration.

During the last decade, before the pandemic, a simple rule governed housing investment: The lesser the density, the higher the risk.

The lesson emerged from the financial rubble of the Great Financial Crisis of 2008-2009. The view was caricaturized by the hit TV tragicomedy Arrested Development, which depicted a family-run housing developer’s demise in the far-flung exurban desert of Southern California. In real life, housing developers shifted to smaller lots and began building apartments as well. Institutional apartment investors bet heavily on coastal markets and downtown submarkets.

That view, of course, proved faulty, not just when COVID-19 hit, but long before that. Like with many things, COVID-19 was the accelerator of preexisting trends in housing. It’s also a reminder to be skeptical of those who generalize trends. Not every suburb in 2009 could be defined as speculative sprawl; in fact, relatively few were. And not every downtown in 2021 is dead; in fact, most aren’t.

Looking ahead, what will be the lasting impact of COVID-19 on housing? It probably won’t be the demise of the urban core. It won’t be a massive upward shift in homeownership. It won’t be that single-family rentals are preferrable to multifamily or vice versa. The biggest impact will likely be on policy, as the pandemic put rental housing, in particular, in the crosshairs of policymakers, elevating investment risks in a handful of large coastal cities.

Small, But Significant Shifts

The big picture housing demand patterns are unlikely to materially change. Sun Belt markets will remain magnets for growth and relocations. Suburbs should continue to outperform urban cores, as has been the case since 2013. And all major housing types stand to thrive, boosted by favorable demographic tailwinds.

Rather than major shifts, expect smaller ones. We’ll see continued evolution in floorplans and amenities tailored to current tastes within new developments. As one example, the added time people spent at home has more households looking for fresh-air amenities like patios and balconies. We’ll also likely see the continued emergence of tertiary cities as more households choose to work from anywhere. Well-located smaller cities near mountains (i.e., Boise, Provo) or beaches (i.e., Charleston, Savannah, Wilmington, Sarasota) should remain popular among both renters and buyers.

Inventory Shortage and Higher Prices

There’s one more lesson COVID-19 taught us: Housing is essential. Because housing is essential and because way too many local and state governments put up way too many roadblocks to new supply, demand has vastly exceeded supply in the pandemic era. Bearing a black swan event (which we’ve learned the hard way can never be ruled out), there’s little reason to expect housing demand to materially erode over the next few years.

Because of much more demand than supply, major housing types are seeing historically low levels of availability, triggering historically high levels of price growth. Apartment occupancy hit an all-time high of 97.1% in August. Single-family rental occupancy is at the highest level since 1994. And the number of active listings among for-sale homes remains far below normal.

Given the supply shortages, price growth for all housing options has reached multi-decade highs. Apartment renters signing a new lease paid more than 18% above what the previous resident paid for the same unit, a record high roughly equaling the blistering pace of for-sale housing price growth, according to data from RealPage and the National Association of Realtors.

Rent growth in single-family homes also hit a record high of 12.7%, according to data from Chandan Economics. These peak numbers are certainly unsustainable, but the cooling to come should be moderate as the market shifts from “really, really hot” to just “hot.”

The remarkable performance of all housing types—for-sale homes, single-family rentals, and multifamily rentals—should erase the false narrative of a cannibalistic relationship between them. There is no real evidence to support the common misconception that rentals suffer when home sales increase. They tend to move in tandem, as a rising tide of economic growth and household formation fuels demand for all housing types. Housing demand drivers have almost all been very strong since summer 2020, a fact obscured by policymakers’ and media’s rightful focus on the small share of households struggling to pay rent or mortgages.

Geography Influences Investment Risk

Investment risk levels going forward are likely to vary less by housing type and more by geography. Although tales about the death of downtowns and big cities are grossly exaggerated, the pandemic era does raise worthwhile questions about the risk/reward profile of urban versus suburban, as well as coastal gateway city versus Sun Belt market. A deeper review shows that COVID-19 only magnified performance and risk gaps that existed before the pandemic, even if many investors and lenders missed those indicators before the pandemic.

In the years following the Great Financial Crisis, apartments in large Sun Belt markets produced better risk-adjusted returns with lesser volatility compared to core gateway markets (generally perceived by investors as lesser risk) like New York, Boston, Washington, D.C., San Francisco, Los Angeles, and Seattle, according to a fall 2018 research article in the Pension Real Estate Association’s Quarterly Magazine. However, investor and lender preferences hadn’t quite caught up with renter preferences, leading to favorable pricing in the Sun Belt.

Although that study was limited to apartments, the other sectors would likely show similar patterns. Not coincidentally, large homebuilders and institutional single-family rental owners also tend to concentrate in Sun Belt markets, as do apartment developers.

Gateway city volatility and risk were further heightened during the pandemic era, likely for the long-term. Eviction bans remain in place in most of these cities, less so in Sun Belt cities, even with the national moratorium in the rearview mirror. Those renter protections have not been paired with sufficient property owner protections.

As one example, most eviction bans apply even to higher-income renters ineligible for federal rental assistance, meaning there’s likely no reimbursement for unpaid rent—even as property owners must still pay property taxes, staff, maintenance, insurance, and mortgages. There’s concern among some real estate investors that heightened political climates will lead to discussions of long-term, underfunded eviction bans, rent controls, and other policies hostile to property owners.

Another layer of the geographic story is urban versus suburban. The rental dynamics are often grossly oversimplified, whereas the truth is rather complex. There’s no doubt that downtown areas are seeing a resurgence in demand following a challenging 2020, but suburbs have outperformed for most of the last cycle, producing roughly twice as much rent growth, on average, from 2013 to 2019.

The splits deepened in 2020, as rents held flat in the suburbs while falling sharply in urban areas. Supply plays a big role. New construction expanded the apartment base by an average annual rate above 4% in downtowns nationally versus less than 2% in the suburbs. More supply means near-constant competition from lease-ups, often competing for the same upper-income renters.

Going forward, there’s little reason to expect the urban/suburban dynamic to change. For one, there’s the long-term question about urban housing demand, assuming increased remote work is the new norm.

Secondarily, supply will remain a big factor. Downtown supply nationally will continue to grow at twice the rate of the suburbs over at least the next two years. As much as developers want to build in the suburbs, it’s very challenging to build in desirable locations given NIMBYism and because restrictive zoning is more likely to occur in the suburbs than in a downtown.

Single-family build-for-rent developers face similar challenges, but they’re generally finding opportunities (as are homebuilders) in outer-ring suburban locations where there tend to be few apartments and more welcome arms toward development. It’s worth noting that single-family construction remains stubbornly limited in spite of demand. Multifamily construction has been more plentiful, but less so in suburban locations where demand is strongest.

The big takeaway from all this? COVID-19 has changed the world in many lasting, significant ways. But for housing demand, COVID-19 served to highlight and accelerate patterns that began long before the pandemic.