Performance of Multifamily Real Estate Investments During a Recession

I’ll bet you have heard this already, but one of the most reliable, recession-resistant investments that a real estate investor can make is investing in multifamily apartment units. Multifamily apartment performance during inflationary pressures outperforms most other assets in the commercial real estate sector simply because the multifamily sector serves a basic human need – the need for shelter.

We as multifamily housing real estate investors provide solutions to this basic human need.

When prices rise dramatically, that affects the U.S. economy, such as the stock market, housing prices, costs of goods and services, higher interest rates, and various other economic factors. During the last financial crisis – the great recession of ’08 – investors were shaken and were understandably losing confidence.

Today we are hearing rumblings of an inevitable recession on the horizon. The stock market is experiencing volatility while housing values and apartment rents have skyrocketed. The effects and economic impact of rising inflation can be felt in virtually every industry.

The most recession-resistant investments such as multifamily apartments tend to do well even in fluctuating, unpredictable markets. This is why we always look for solid fundamentals such as good population growth and strong job growth among a variety of other metrics when considering commercial real estate opportunities. The performance of commercial real estate is definitely not all the same during high inflation. However, the one commercial real estate investment that has historically done well during economic downturns is multifamily investment properties.

Multifamily Investing Versus Other Commercial Real Estate

During times of inflation, and particularly now, investors are looking to invest in commercial real estate asset classes because they can provide a great hedge against inflation. One of the most favored asset classes within the commercial property sector has been multifamily buildings and housing in general. Multifamily provides a tangible and more stable investment option in uncertain times for investors.

The popularity of investing in multifamily units has been largely due to investors seeking to place their inflation-wary dollar into more stable assets so that they can receive strong, consistent cash flow, appreciation, and extraordinary tax benefits.

Even in times of frequent interest rate spikes from the Fed and economic uncertainty, multifamily still fares well because as inflation rises so too is the ability to raise multifamily rents to keep up with inflation. Additionally, property values can typically increase with inflation creating another favorable factor for multifamily investing.

Multifamily has a wide range of asset classes from class A (luxury or new build) assets to class B and class C, which is workforce housing, the type of investments that PCRP seeks to invest in. Then there is a class D asset within multifamily, which are assets that can require quite a bit of work and the tenant base is less stable. We, at PCRP Group, DO NOT invest in class D properties.

How Consumer Behavior Help To Determine A Good Investment

There are other commercial assets that investors can invest in such as office buildings, shopping centers, self-storage facilities, and industrial warehouse space, just to name a few. However, some of these other asset classes have proved to be less than desirable investments during a recession, such as office buildings and retail centers.

One only has to look back historically to analyze consumer trends and behaviors during particular economic events to see that multifamily has performed exceptionally well.

So, it’s critical for investors to understand consumer behavior, consumer spending patterns, and basic human needs when reviewing potential investment opportunities, particularly if we are on the cusp of a recession.

Multifamily apartment buildings are experiencing historically low vacancy rates and high demand, particularly in the affordable housing sector. We are seeing exceptional rent growth metrics despite the anticipation of an economic downturn. Here’s why:

Why Multifamily Real Estate Will Continue To Provide Excellent Cash Flow

All tenants desire safe, clean, and affordable housing options. However, in areas of the country that are seeing the highest population growth and job growth, there is a particular demand for workforce housing because of the consistent migration to these cities and surrounding areas. This is why PCRP Group concentrates on investing in these areas of the United States.

The additional key metrics that we look for in a multifamily property within a particular real estate market are strong labor statistics, rent growth, diversity of jobs (not just job growth), an educated workforce, and strong infrastructure. Having these strong fundamentals among many other factors we analyze, will help us gauge the likelihood of consistent, foreseeable passive cash flow in the coming years for our investors with these multifamily investments.

One key factor as to why multifamily properties do well in economic downturns is that consumer behavior trends show us that people tend to downsize and spend less on everything including housing when a potential recession is forecasted. This means that a solid class B or class C multifamily apartment community will likely be in demand as people start making the decision to seek out more affordable housing.

Also even during a mild recession, another reason people look to rent a multifamily unit is that they may not qualify to purchase a home. Lending qualifications tighten during economic uncertainty which makes it that much harder for the potential homebuyer to purchase a property, so they may likely rent a multifamily unit instead.

Why Investments In Different Asset Classes And Markets Are A Smart Decision

Virtually any sound financial advisor will tell you that you should always diversify your investment portfolio. Even if you are a multifamily investor, it’s important to diversify your real estate portfolio with other assets and invest in other real estate markets as well.

When you are diversified across different asset classes in different markets you are protecting yourself from any one of those asset classes or markets becoming less profitable. Some investors will only invest in multifamily, class B assets in a particular city, for example, and we personally like to make sure we are in different cities among different asset classes to properly diversify our real estate portfolio.

The fact is, that no matter what economic conditions we are in, we have a severe housing shortage in the U.S. There is a new supply of class-A apartments that are being built in an effort to keep up with demand, but again these are not usually considered affordable to meet the workforce housing demand. Additionally, due to the complications caused by CoVid (such as supply chain issues) and the ravages of inflation, all construction costs have skyrocketed; supplies, land, and labor. This has led to a negative impact and slowdown of new construction, which is putting additional pressure on the demand for affordable housing units.

Multifamily investors know that given all of these factors that investing in workforce housing apartment communities will likely be a smart investment for the foreseeable future.

Bottom Line For Multifamily Apartment Investing

Certain asset types within the housing market, particularly single-family homes, tend to fare worse in recessions due to the high cost involved with procuring a down payment, paying the mortgage, and maintaining a single-family home when times are lean. On the other hand, multifamily rentals do very well for all of the reasons we mentioned earlier.

Generally, apartment rental rates remain steady or even increase during a recession, while single-family home prices drop.

Remember, that no matter what the economy is doing from month to month or year to year, the basic need for housing exists and is forecasted to be in extremely high demand for years to come. This is the main reason multifamily investing can be a recession-proof investment. No matter what the federal reserve does with interest rates, it is a good time to explore investing in the multifamily market.

Real estate investors know that there are always risks with any investment choice. However, multifamily rental properties can provide extraordinary investment opportunities for savvy investors.

Note: We are not financial advisors or tax specialists, and we are not providing investment advice. We always recommend that you consult with your financial advisors before making any investment decisions.

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