Multifamily Investing In A Recession-Prone Environment

Word has spread across various channels warning of a potential recession on the horizon. While none of us are sure which way the wind will blow, the Federal Reserve has recently raised federal rates amid inflation’s 40-year peak. Market fluctuations have also grown significantly more volatile, with economists predicting a 60% probability (subscription required) of a recession within the next 12 months. Suffice it to say, a severe market decline is a potential reality that we all must bear the burden of withstanding, especially in questioning where we choose to invest. Let’s explore different possibilities to find stability through multifamily investing amid the shaky tide of net losses and gains.

Learning From The Past

We should all be well acquainted with troublesome economic patterns given our previous exposure a little over a decade ago. The example of 2007-2008 laid the groundwork to help investors withstand a future economic downturn. In recent years, modern multifamily investment has displayed an even more significant degree of growth and stability than one would initially expect in the wake of the Covid-19 pandemic. In the past, I’ve claimed that real estate investing’s most vital attributes include generational shifts, impacts on demand, supply shocks and investor demand.

Real estate investing displays striking recession-resistant features, one of which is the intrinsic human need for affordable housing options regardless of bull or bear market status. Housing is a fundamental human requirement and, when faced with the prospect of a downturn, many risk-averse individuals choose to continue renting rather than explore the economic stresses of homeownership. Today, we’re seeing that home prices have not decreased, while interest and mortgage rates have gone up significantly compared to even months ago. Some analytics have found that the average single-family home is 43.7% more expensive than it was in 2019. Additionally, when markets weaken, former homeowners often return to the rental market as a haven from foreclosure. Add this to a slackening wave of labor required for homebuilding, and it’s very easy to see how demand might swing in real estate’s favor for flexible investment.

When we examine the previous economic downturn’s ripple effects, reports indicate only a 7.9% cumulative rent decline in multifamily, contrasted to 17% in industrial/office rent and approximately 14% in retail. And that doesn’t account for the state of real estate at that point in history compared to today’s sounder, more technologically advanced footing. In our modern economy, residential apartments possess an extremely handy quirk in dealing with inflation. If inflation is high, rent growth will increase as well because rents make up 40% of the consumer price index.

New Residential Spaces

Class A real estate typically yields solid returns when centrally located in walkable, urban areas surrounded by amenities, providing a sense of both cost-effective and convenient living to future tenants. Multifamily’s durability, practicality and adaptability across divisions all cement it as a major marker for profit growth regardless of downward shifts in the global economy at large.

In recent years, I’ve additionally seen a high degree of success in off-campus student housing. The need for new residential spaces close to major universities, thanks to the ever-increasing importance placed in higher education, has remained a growing trend throughout the decade. Even more striking, overall occupancy volume has bounced back very quickly even in the face of unprecedented global circumstances. Following the effects of the Covid-19 pandemic, occupancy rates initially declined. But subsequently, they rebounded to higher than pre-Covid levels for the 2021-2022 school year. Even in the previous financial crisis, student housing seemed to prosper overall, with university enrollment growing consistently throughout 2007-2009.

The off-campus student housing market is expanding further, with steadily growing enrollment in the largest universities. Student housing has great supply-demand metrics, with excellent visibility given its pre-lease environment, offering a safe hedge for investors looking for low-risk, resilient pursuits. Investors are enjoying the high rent growth that multifamily and student housing provide because of the short-term nature of their leases.

Final Thoughts

The right real estate investment opportunity is comprehensive, aims to generate strong income streams and ultimately preserves wealth across economic cycles. Investors are rightfully cautious when it comes to their financial pursuits, but there is also plenty of room for exploration, operational trust and attention placed on the more intimate human-oriented details that shape the need for places to live. Ultimately, carefully selected real estate ventures have the potential to allow investors to reap the benefits of long-term wealth creation even through periods of economic uncertainty.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

The original article with Forbes can be found here:

Published on 11/4/2021