The Future of Wellness Real Estate and Build-to-Rent

Early Real Estate Investment

In 2009, Neil, a data scientist, used data analysis to identify a city, in Madera, California, where real estate had significantly fallen in value since the 2005 peak. He believed it was an opportunity to invest, even though many people were skeptical about real estate. Neil purchased multiple single-family homes in Madera, leveraging data analysis to attract tenants from nearby Fresno. This initial investment venture provided him with the capital and confidence to explore further real estate opportunities.

Transition to Wellness Real Estate

In 2020, Neil shifted a significant portion of his real estate business towards large development projects, specifically in the field of Wellness Real Estate. This change allowed him to focus on projects that prioritize wellness and health aspects within real estate developments. This shift was driven by his interest in incorporating wellness concepts into real estate and finding opportunities in this emerging sector, offering both higher profitability and increased investor satisfaction.

Wellness Real Estate and Delos

Delos, a company founded by Paul and Peter Scialla, recognized the shortcomings of LEED certification, which primarily focused on new construction. Delos decided to address the other 95% of existing buildings and developed the Well Living Standard. This standard emphasizes wellness in real estate, including air and water filtration, circadian rhythms, and overall health. Delos has become a unicorn company, particularly in the wake of the pandemic and the rise of ESG (Environmental, Social, and Governance) standards, partnering with LEED and expanding its influence across various industries. This initiative led to the creation of Ugro, a wellness living real estate company, and a new wave of Build-to-Rent (BTR) projects.

Implementation of Delos in Build-to-Rent

Ugro, a wellness-focused Build-to-Rent real estate company, collaborates with Delos to bring wellness living to Class A properties. Delos-powered units in Ugro properties offer air and water filtration, enhancing the living experience. The business case for implementing wellness features in Class A built-to-rent units makes sense, as the added cost per unit is minimal compared to the benefits and demand it generates. This combination of wellness and Build-to-Rent has become a significant trend in the real estate industry, with a substantial amount of investment flowing into this sector.

Retrofitting Existing Buildings for Wellness Living

Retrofitting existing buildings to incorporate wellness features, like those offered by Delos, is a noble vision but faces challenges. The development industry lacks strong lobbying for public-private partnerships to modernize millions of units, particularly in the affordable housing sector. While there's potential in retrofitting Class B buildings and improving aging infrastructure, it requires government intervention and financial assistance. The transition to wellness standards may take a decade or more but can positively impact housing for the long term.

Outlook on Multi-Family Valuations and the Economy

The data science perspective suggests that a recession in the US is inevitable, likely occurring in the second half of next year. The Federal Reserve's aggressive rate hikes may lead to a longer cycle before the recession sets in. Multi-family property valuations have seen drops in certain markets, with adjusted values per door down 8-12%. This trend is expected to continue with potential further declines of 5-7%. However, there's optimism for multi-family investments in 2025 and 2026, driven by accelerated household formation and supply constraints, which may create opportunities for investors.

Impact of Infrastructure Constraints on Development

The United States is facing significant challenges in infrastructure development, particularly in growing states like Texas, Georgia, and Florida. Cities are running out of cheap land with zoning, permitting, and utility constraints. The lack of infrastructure, such as sewage systems and water supply, is slowing down construction projects and impacting the housing industry. This issue deserves more attention as it could affect housing availability and development timelines in the coming years.

Advice for Investors in the Current Market

Investors should consider holding onto their investments, especially in the real estate market, despite challenges and uncertainties. While the near future may not bring immediate benefits, data suggests that during and after a recession, there is a significant potential for rent increases. Holding onto investments through 2024 into 2025 may lead to strong returns. Additionally, focusing on wellness real estate, government-private partnerships, and overseas virtual teams can be advantageous strategies for success in the current business landscape.

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Courtesy: Neil Bawa

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