Is Multifamily Real Estate Recession Proof?
by Christopher Levarek
“In times of recession there are massive opportunities and fortunes to be made, so for new up and coming entrepreneurs, this is the time to go and start a business.”
- Richard Branson
Inevitably with every economic cycle for a country or for the world, there will be a high and there will be low. At present, everyone is holding their breath in anticipation for the pullback or “recession” in the United States. Some ambitious real estate investors have been waiting since early 2017 and yet, here we are in 2022 still chugging along. Yet, we would be remiss to think this journey can last forever.
Like a roller coaster ride, eventually you reach the bottom, which makes the peak that much more exhilarating. We appear to be very close to topping that peak and heading to the bottom as repeated news of inflation, inverted yield curves and falling stocks flood the news. So what do we do, hide and await impending doom?
Why no…we invest in multifamily real estate of course!
But really, quite often real estate gets labeled as recession proof or resistant. Today, I’ll be discussing how or why this is the case and how you the investor can shelter your investments in real estate or even thrive during a recession.
Why Recession Resistant?
So the term recession resistant is just like it sounds, an investment that is less or not as affected by a pullback or recession. This type of investment can also be called recession proof. Real estate, or certain forms of real estate, are consider to be recession resistant or even recession proof. By no means however, does this mean all real estate is not affected by a recession, we have only to look at 2008 crash to disprove this of course.
Yet, some real estate has significant advantages during a recession over stocks, bonds, mutual funds, metals, crypto, etc.
Here are some asset classes in commercial real estate that thrive and/or are less affected by a recession :
Multifamily Real Estate or Apartments
Storage Units
Mobile Home Parks
Let’s look closer at why Multifamily is Real Estate Recession Proof in many cases but most especially this cycle…
Multifamily Real Estate
Again, not all multifamily real estate is made the same. Much depends on the asset performance and condition as well as the market or location of the property. If we were to compare properties in Portland, OR with properties in Dallas Fort-Worth, TX, there would many varying characteristics that could benefit or could not benefit said property during a recession.
With this being said however, Class A-/B(+/-) multifamily real estate in a good market which has good population growth, rent growth, lower than natl. average unemployment, multiple employers, will perform very well during the upcoming recession.
Here is why :
Current low inventory on affordable housing and supply of apartments nationwide.
High demand of apartment or communal living from millennials, seniors and immigration.
Supply chain disruption for last two years has caused an additional shortage of supply in inventory for residential living.
Everyone needs a place to sleep(yes it is true, even if commonly said)
During a recession people move down from luxury apartments or downsize from homes to apartments.
Home prices are at an all-time high out pricing many home buyers creating new renters.
Far too much liquidity(cash) in the market with low interest rates ensure high home prices for next 2-3 years.
These are just some significant reasons why apartments during a recession will still be occupied with renters paying rent and creating income for apartment investors.
For an apartment to lose tenants or “not create income”, we would need an oversupply of apartments and a trend of lowering of rents as apartment owners compete. This is just not, nor will be, the case during a recession when the supply is already undersupplied and people are downsizing from homes or luxury style living.
Even if many apartment complex investors take advantage of the above, an investor can further shield their investments from a future recession by choosing well placed Assets in thriving markets such as Florida, Texas, Arizona, the Carolinas, etc. This will only further mitigate potential risk. Phoenix, Arizona, for example, had 30% rental growth last year in multifamily real estate for 2021 and shows no signs of stopping.
In Final
So is multifamily real estate recession proof? I would say yes, yes it is. When selected correctly and located in a well rounded thriving market, this asset class will perform much better than other investments in this coming recession.
There will of course be increased costs, during a recession, associated with property management, supplies and financing, which will translate to the bottom line; however having that steady demand or rental income will allow investors to face those potential cost increases.
As always, remember to do your due diligence on the market, the property and any group you invest with to ensure you are investing in a recession-resistant multifamily asset for the next few years. Happy Investing!