When it comes to real estate investing, it's important to stay on top of your portfolio and be prepared for anything. With renewed concerns over rising interest rates and the potential for an economic downturn, real estate investors have to be aware of investments they can make that can stand up to a possible recession. Experts have been putting the spotlight on multifamily investing, seen as a more resilient asset that can stand up to times of economic uncertainty.
Understanding Multifamily Property
Apartment buildings, rental properties, duplexes, and trailer parks are just some examples of multifamily real estate. However, not all multifamily housing is made the same. It depends on the asset's performance and its location within the United States. Within the landscape of multifamily property, there is a property class system, ranking A-C. This system takes into account the age, location, condition, and amenities that a multifamily property offers.
Multifamily investing is viewed as a sensible move in markets demonstrating good population growth, rent growth, and unemployment rates below the national average. Class A properties tend to be located near major employers. These multifamily buildings are located in areas where people generally want to live. Real estate investors see these as safer investment opportunities because of the attraction to rentals in the region.
Class B multifamily properties tend to be located on the fringe of a primary market, with buildings tending to be in older and less pristine condition. These properties may need light renovation but are still considered a worthwhile investment as these properties attract long-term renters.
Class C carries a little bit more risk for multifamily investors with the need for a significant renovation of older properties. These locations often sit in areas that aren't as desirable of markets for renters to explore.
Lessons Learned from Past Recessions
The collapse of the financial system during the Great Recession in 2007 dealt a blow to investor confidence. During that time, apartment Real Estate Investment Trusts (REITs) experienced volatility as much as other investments. However, multifamily investors saw a quicker bounce back than most in the commercial real estate realm. Experts found that this was due in part to growing rents across the United States.
While the COVID-19 pandemic created an abrupt change in the housing market, statistics over the last year show that multifamily buildings are once again seeing a surge in tenants looking for rentals within certain markets. With rent changes being held off in order to accommodate potential renters, investors are no longer fretting as much as they did in the earliest days of the pandemic. This is optimistic compared to the commercial real estate sector, which is struggling in major markets as many employers switch to a work-from-home or hybrid model for the workplace.
Multifamily investors have come to realize that people will need a place to live and want quality in comparison to the rental rates in a given region of the U.S. Identifying these opportunities starts with strong fundamentals, spotting adjusting vacancy rates and property values to track the amount of money coming into the area. History has shown that the performance of multifamily assets in a recession tends to be more stable than other parts of a real estate portfolio.
Holding Up During the Downturn
While not all multifamily properties are the same, there are similar trajectories that make it a wise part of an investment strategy in the long run. With a high demand for rentals in residential buildings, there's currently a low inventory of affordable housing and the supply of apartments nationwide. This has proven true across different market conditions from the Great Recession of 2007 to the post-COVID economic boom of 2021.
The real estate market is also constantly seeing new potential tenants emerge to fill vacancies in multifamily buildings. Millennials and seniors currently lead the way in seeking a sort of communal experience from this property type, which is leading the way for those demographics to explore what amenities and accommodations come with their lease. A real estate investor will recognize the attraction of particular markets and work with property management companies to bring in lessees.
Recent supply chain issues have also dramatically impacted the availability of residential properties, as construction crews and property managers await goods and materials to complete necessary renovations. This is sending renters searching for available properties on the market. Plus, with home prices at an all-time high, renters are looking to save as much money as possible. This results in renting an apartment or condo for the time being, to perhaps build up the bank account to put a down payment on a house.
Bracing for Economic Impact
With rising inflation and concerns about a potential recession on the horizon, many Americans are gearing up to buckle down. Some are looking to avoid higher rent by downsizing from luxury condominiums to multifamily properties that suit their monthly budget. Bracing for an economic downturn requires investors to look at the key metrics that impact their investment properties.
The occupancy of a building at the present moment is at the forefront of deciding to add a multifamily property to a real estate portfolio. However, any investor should take a closer look at the long-term picture, making sure there will remain a high demand in a given region or area even with an economic downturn. Potential investors should also monitor an area for a housing shortage, knowing that any such investment in the region could work in their favor to find occupancy for a number of apartment units or other rentals.
The multifamily market is also a wise investment based on a simple principle: people need a place to sleep. With rentals on units reaching pre-pandemic levels, investors can have peace of mind in multifamily rentals being a draw, even with rental prices increasing. As Americans gear up to potentially downsize, a large apartment building in a larger urban market could be a great investment depending on the asset class. A Class A or B property, as referenced earlier, could end up being the best draw and create significant real estate deals in a fairly quick amount of time.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: https://goodegginvestments.com/