Finding Your Path

Reflections on an Interesting Year

By Lorne Polger, Senior Managing Director

Lorne PolgerIt’s hard to believe we’re nearing the two-year anniversary of the onset of the pandemic. In some respects, 2021 feels like a second lost year. While we were buoyed with lots of good news along the way (vaccines and boosters, the end of lockdowns, the reopening of social gatherings, sporting events, concerts and live theatre and a robust market for apartments), we were whipsawed with many challenges, too (including Delta and Omicron variants, inflationary price increases, supply chain disruptions and employee shortages).

I got Covid this fall, after being vaccinated twice this spring. I was fortunate in that my case wasn’t that bad, although losing my sense of smell for several months was unsettling. Many people asked me, “do you know how you got it?” Well, perhaps it was when I went for a walk. Or at the grocery store. Or when we went to dinner one night. Who knows?? This illness is everywhere these days, especially in its current Omicron variety. I suspect that at some point over the next year or two, virtually all of us will have had Covid. I no longer think that it’s a question of if, only a question of when. At this point, those of us who are vaccinated and boosted and fortunate to not have underlying health conditions should be fine. I also suspect that boosters will become a regular part of our lives for the next few years, if not longer. A very small price to pay, in my opinion.

The three biggest surprises to me in the commercial real estate world over this year were the strength of the apartment market, the amount of capital in the marketplace, and the resiliency of the office sector, notwithstanding the massive changes that have occurred in how we work.

The Strength of the Apartment Market

Laptop and Collage of Images When the pandemic first hit, we were concerned about the bottom falling out in the apartment market. Tens of millions were out of work, the stock market was in free fall and, notwithstanding occupancy rates of 95% or better in most of our markets, we wondered whether our tenants would be able to pay their rent. During the pandemic, occupancies at most of our properties rose to 97%-98%, collections exceeded 98% of scheduled rent, and demand for renovated units remained strong. Our leasing teams navigated the dynamic environment by closing clubhouses and gyms, then reopening and sometimes closing these facilities again. We leased scores of apartments via virtual tours with tenants signing leases sight unseen.

In many of our markets, we saw double-digit, year-over-year increases on new leases; in some markets, the average increases exceeded 20%. That’s both good news and bad news. Certainly, it’s good news for revenue (income) and value growth in our portfolio. The downside is twofold. First, it directly reflects the inflationary times that we find ourselves in (just in case you hadn’t noticed the last time you filled up your car, went to the grocery store or went out to dinner). Second, it further stretches the wallets of our hard-working tenants across our portfolio of workforce housing.

While we expected a robust recovery in 2021 following a challenging 2020, we were taken aback by the vibrancy of the recovery in occupancies and rents.

We certainly don’t forecast the same increases for 2022. While we believe the apartment market will remain strong in 2022, and rent increases will likely exceed historical averages, we think most of the bounce has already occurred. From our perspective, it’s healthier over the long-term for rent growth to be more moderate.

We were also extremely fortunate to catch an opportunity with three distressed deals that we purchased in 2021 for Pathfinder Opportunity Fund VIII. These relatively new, Class-A properties were 40%-60% leased when we found them and are all at or over 95% leased today. The properties leased back up quickly and have been ahead of budget in both revenue and occupancy.

Overall, we are very pleased with how our entire portfolio is performing going into 2022.

An Ocean of Capital

The second surprise was the continued huge amount of capital in the marketplace, which has contributed to driving up pricing to near nose-bleed levels. Perhaps we should not have been surprised. In a near-zero yield environment with inflation expectations running well above nominal interest rates, investments in rental housing have remained at or near the top of many savvy investors’ wish lists. We don’t see anything that would reduce the level of liquidity in the near- term. Accordingly, we will remain very disciplined with our purchases in 2022, and only invest in opportunities we feel offer solid value for our money.

Strong Demand for Office Space in a 'Work from Home’ and Virtual Work Environment

Notice of Rent Increase with coins and keysPathfinder shifted to a virtual office environment in March 2020, and we’ve remained in a virtual/hybrid office mode since then. Many of my business associates have taken similar paths, and of course, we’ve all read about how some of the large technology companies have led the charge in this area. As such, I’m scratching my head at how office landlords have maintained (and in some markets, even increased) their asking rents! It just doesn’t make sense to me. Whatever space you’re in today, you probably need less of it tomorrow. So why would office lease rates rise? Office vacancies in many major markets remain at historically high levels, especially so in downtown submarkets. Return to work dates have been pushed back again and again. Whenever companies return to the office, it seems a safe bet that fewer people will work there each day, reducing overall demand for office space. Sure, distancing may necessitate more square feet per employee, but I wonder when the shoe drops with office.

I’m thankful for many things over this past year. The love of a great woman. The health of my family. The joy in seeing my adult children launched in their careers and in successful relationships. The ability to experience travel again. The continued success of our business. I hope that 2022 brings greater health, joy, and success to all of you.

Lorne Polger is Senior Managing Director of Pathfinder Partners.  Prior to co-founding Pathfinder in 2006, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group. He can be reached at

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