If you haven’t heard already, one of the most reliable, recession-resistant financial moves someone can make is to invest in multifamily real estate. Multifamily performance during a recession outperforms other types of commercial real estate simply because it serves a basic human need – people need somewhere to live.
As multifamily investors, we provide solutions to people’s needs.
There are challenges, however. In past recessions, we have experienced high demand for multifamily real estate while also facing simultaneous increased costs to own and manage those apartment buildings properly.
Any time prices rise dramatically, that influences the US economy, affecting the stock market, property values, costs of consumer goods, interest rates, and other economic conditions. During the Great Recession of 2008-2009, 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.
Again, 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 investing in areas with strong population growth. One type of commercial real estate investment that tends to fare well during the most uncertain times is multifamily investment properties.
Related Article: Why Investing in Real Estate is a Great Hedge Against Inflation
Multifamily Investing Versus Other Commercial Real Estate
During this time of uncertainty, investors are turning to commercial real estate since it’s one of the most stable, tangible investments available. There’s been a dramatic shift of real estate investors toward multifamily buildings since this particular asset class provides a combination of cash flow, appreciation, and tax benefits, even in times of rising interest rates and an unsettling economic outlook.
Within multifamily investments, you’ll find a wide array of asset classes ranging from newly-built class A luxury apartments to more modest class B apartments and class C workforce housing.
Other commercial real estate property types available to investors include office buildings, retail, industrial, self-storage, and even parking lots and garages. However, if you consider what usually happens during a recession – job losses and reduced or lost incomes – retail sales typically plummet. In addition, as we all wade through the aftermath of the recent pandemic, people are embracing technology to efficiently conduct business from their homes, resulting in reduced demand for parking and office space.
Therefore, it’s important 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 nationwide, we are seeing strong rent growth in multifamily assets, despite the threat of an upcoming recession. Here’s why.
Why Multifamily Real Estate Will Continue to Provide Excellent Cash Flow
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 does multifamily investing continuously have great returns on investment even during a recession? Simply put, people tend to be more frugal during a recession – they spend less, travel less, and do less overall, but they still require a place to call home.
Some people choose to downsize or sell their expensive homes in exchange for something more affordable. Others may reduce their monthly expenses by moving out of a fancier class A suite and into a remodeled (still very nice) class B apartment, or from class B into a more frugal class C unit. This illuminates the consistent demand cycle as tenants move between multifamily asset classes based on their income, lifestyle, and the economy.
During a recession, people who struggle to qualify to purchase a home become reliant on the multifamily market for shelter, so the demand for multifamily rentals remains constant, even if it varies by class.
Why Investments in Different Asset Classes are a Smart Decision
It’s always a smart move to have a diversified portfolio. This is still true even if your syndication preference is in multifamily investing. It’s best to vary your portfolio within the multifamily investment sector with passive deals in different asset classes and markets.
During a recession, certain markets across the country may be more deeply affected by rising prices and experience a lower vacancy rate as a result. On the other hand, certain markets may experience a boom as the local economy benefits from federal reserve decisions, depending on the businesses in the area.
Along the same lines, renters may choose to move up or down in asset class within the multifamily space, depending on their budgets and employment situations.
This doesn’t mean that all class A apartment buildings will experience low vacancy rates during a recession, as there will always be people demanding higher-profile spaces with the trendiest finishes, no matter the economic conditions.
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 for housing. Yet, during these times when inflation is high, new construction costs increase, slowing the completion process of these multifamily properties. This, in turn, helps keep the demand for housing high, subsequently keeping rents high as well.
This means that having a diverse investment portfolio in multiple multifamily asset classes will help ensure that your cash flow remains consistent.
How do Rental Rates Perform 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.
Multifamily Properties’ 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-resistant 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.
Further Reading: How to Weather a Storm — 5 Ways to Diversify for Long-Term Growth