Gross Domestic Product increased 0.6 percent after two quarters of decline, but key components continue to show an economic slowdown. Falling stock market indexes and looming inflation indicate we could still be heading for a longer recession. Multifamily real estate can be a more reliable and recession-resistant asset during a downturn. It tends to outperform other types of commercial real estate simply because it serves a basic human need – people need somewhere to live.
Furthermore – the current inflationary period brings higher prices that dramatically influence the US economy — affecting the stock market, property values, costs of consumer goods, interest rates, and other economic conditions. During the Great Recession of ’08-’09, the financial system and the economy waivered, as did most investors’ confidence.
Fast forward to today, and we’ve been hearing whispers of a possible recession for months while the stock market has experienced volatility and housing prices (single-family homes and multifamily units alike) have skyrocketed. The economic impact of high inflation can be felt in just about every business.
Only the most recession-resistant investments will fare well as the economy fluctuates and markets seem unpredictable. This is why, even in the best of times, we only consider commercial real estate opportunities with built-in protections like good population growth in the area. One type of commercial real estate investment that tends to fare well during the most uncertain times is multifamily investment properties.
Multifamily Investing Versus Other Commercial Real EstatE
During this time of uncertainty, investors are turning to commercial real estate since as it is one of the most stable and tangible investments available. There has been a dramatic shift of investors toward multifamily buildings since the asset class typically provides a combination of cash flow, appreciation, and tax benefits, even in times of rising interest rates and an unsettling economic outlook.
Other commercial real estate property types available to investors include office buildings, retail, self-storage, and parking lots and garages. Consider what usually happens during a recession: job losses and reduced or lost incomes lead to lagging retail sales. Additionally, as we all wade through the aftermath of the recent Covid Pandemic, people are embracing technology to efficiently conduct business from their homes resulting in rare trips to the office. Therefore, it’s essential to consider consumer behavior and basic human needs while searching for an investment opportunity with a potential recession looming.
With historically low vacancy rates and high demand for affordable housing in multifamily property and apartments nationwide, industry experts are seeing rent growth in multifamily assets, despite the threat of an upcoming recession.
Multifamily Real Estate Will Continue To Provide Returns
Areas reflecting upward trends in population growth make prime locations for multifamily investing since new and existing tenants alike require a safe, comfortable, and affordable place to live.
Multifamily investors look for areas that have positive labor statistics, strong fundamentals, and great neighborhoods. When these fundamental market factors are met, multifamily investments will see consistent passive cash flow for the unforeseeable future.
Why can multifamily investments produce solid returns on investment even during a recession? Simply put, people tend to be more frugal during a downturn – spend less, travel less — but they continue to need a place to live. Some people choose to downsize or sell their expensive homes for something more affordable. Others may reduce monthly expenses by moving out of high-end class A units and into remodeled class B or C apartments. Similarly, individuals unable to qualify for home purchases rely on multifamily units for housing. Therefore, the demand for multifamily rentals tends to be less impacted by economic headwinds than other investment types or asset classes.
Investments In Different Asset Classes Are A Smart Decision
Similar to diversifying one’s stock portfolio, one can also diversify a real estate portfolio. Investors within the multifamily sector can invest in class A, B, and C assets as well as in different geographical areas to diversify their holdings. During a recession, some markets across the country may be more deeply impacted than others. Other markets may be booming. Remember one fact: real estate is hyperlocal.
Along the same lines, renters may move up or down in asset class within the multifamily space, depending on their budgets and employment situations.
Recession or not, we have a housing shortage on our hands. New construction (class A) multifamily complexes are continuously trying to keep up with the demand. Yet, new construction costs increase when inflation is high, which slows completion. Furthermore, rising interest rates also limit financing for developers and slow pace of development. During recessions, developers tend to tap the breaks on new projects that take years to plan and permit. This, in turn, keeps the demand for existing housing high which helps to sustain rent growth.
Rental Rates Performance In A Recession
The multifamily real estate market has historically thrived during economic downturns, and this year is no exception. When people are threatened with financial strain, they tend to cut back on non-necessities rather than face the possibility of becoming homeless.
While the housing market usually takes a hit during a recession, the rental market tends to outperform other investments. Historically, apartment rental rates remain steady or even increase during a recession, while single-family home prices drop.
This is because the demand for housing still exists, but the rising interest rates and pinched budgets push consumers toward a more affordable rental property type. Consumers generally pull back during recessionary times and choose to wait for a market correction before purchasing their own homes.
THE Bottom Line
Remember, no matter the looming economic storms or increased costs we face, the basic need for housing will always be present. This is the main reason multifamily investing is a recession-proof investment.
There are always risks involved in any investment choice, even if you knew for certain we were facing a bull market. However, despite the crazy inflation rates, multifamily investing always poses potential opportunities for savvy investors.
When selected strategically in areas of rich population and job growth, multifamily properties have exhibited solid performance over the long haul and have a proven track record for stability.