Multifamily real estate investment, specifically income-generating property, has generally been a stable and high-return asset class. However, amid speculations of an impending recession, you may find yourself asking, “Is multifamily a prudent choice heading into a possible recession in 2020? And, how do I find and maintain profitable investments in currently inflated markets?”
Let’s examine the recent economic history and the trends we see that indicate a market downturn. Multifamily investors should also understand what the contraction means, how to find workable deals and how to keep them lucrative despite falling values and rising interest rates.
Historic Economic Expansion
We’re in the longest economic expansion in American history. Veritably, we’ve made it through the first decade in the U.S. saga with sustained economic growth — though at a slower overall rate compared to previous periods. As of December 2019, we’ve experienced 126 months of continuous growth. The expansion’s extended duration has been attributed to a profound recovery from the prior recession.
The Fed’s tight control over monetary policy is designed to support growth and restrain excessive inflation; however, some economists express concern about high debt levels fueled by low interest rates, and that monetary policy may not be sufficient to mitigate recessionary pressures.
Executive policy and international trade wars with China, and now potentially France, also contribute to economic uncertainty. Fortuitously, overly lenient and short-sighted loan approvals, which precipitated the last housing market crash, no longer drive sales volume or appreciation. However, interest rates may be acting in their stead to overleverage homebuyers and investors.
Will The Recession Take Hold In 2020?
The pertinent question here is: Will the recession hit this year?
What’s the answer? More than likely, we’ll see cooling in growth and the stabilization of values and lease rates.
As recently as June, economists were predicting a downturn this year, however, in the ensuing months, predictions have shifted as the result of persistent job gains, income growth, low interest rates and availability of capital.
Some markets may experience declining values and lease rates; however, income property investment will remain a reliable source of revenues and appreciation in markets where demand and supply escalate in tandem toward equilibrium.
Fortunately, we saw other positive signs this fall, including strong consumer confidence and spending, and stabilization of home values, inventories and rents. Additionally, the Fed’s rate cut moves are helping to keep refinance and purchase mortgage volume healthy.
Incidentally, Zillow suggests that decreasing transaction costs as the result of online and reduced-fee home sales models will enhance affordability and stimulate additional demand as adoption accelerates.
The Impact On Multifamily Real Estate Investments
What does this mean for multifamily real estate from a developer and investor standpoint?
It’s mostly welcome news for income property investors. Employment and income growth, and expansion in regional markets driven by tech and manufacturing development, bolster the multifamily market.
Investors can expect to pay less in financing costs, achieve low vacancy and experience stable lease rate increases as the market cools and reaches a new equilibrium. As this equalization is more than a dozen years in the making, it likewise promises to yield a gentle deceleration with favorable economic factors for feasible real estate development and management.
The stabilizing economy may offer opportunities for investment growth; however, poorly managed income properties flounder in any economic climate. Consequently, multifamily investors should take precautions to ensure lean operations and tenant appeal to stay competitive and profitable.
Rapid housing development driven by low rates and capital availability will increase tenant housing options and affordability, with the side effects of increasing competition for occupants and stabilizing rental rates.
Keep It Going In Any Market
Proactive multifamily investors are responding to the dynamic economic environment by positioning their properties through improvements, amenities and marketing to command the highest lease rates and choice tenants. As a contingency, accredited investors are allocating increasing shares of capital into professionally managed assets that reduce risk, bypass increasing competition for acquisitions and require no direct management.
To prevent vacancy and command top-of-market rents, investors should diversify and recession-proof their portfolios by selecting markets and properties that exhibit the optimal mix of economic drivers to support high occupancy — despite any impending interest rate shifts or trade conflicts with foreign economies.
Guidance for viable acquisitions approaching recession:
• Exercise thorough due diligence on the market and subject property.
• Choose markets exhibiting population and income growth.
• Follow the tech sector to find viable markets. (Young professionals and capital follow regional tech development.)
Tenets for operating profitable multifamily income properties:
• Seek undervalued, value-add opportunities.
• Focus on efficiency in energy, labor and material utilization. Do this by implementing sustainable design strategies in renovations and new builds, and leveraging SaaS technology to streamline asset and property management functions.
Inevitable Correction, Certain Opportunity
A correction is inevitable, though uncertain in the timing of its arrival. The epic streak of growth begs a precipitous fall, however legislative and monetary policy have kept a rein on runaway expansion and mitigated the threat created by unscrupulous conduct in the finance industry.
The upside of multifamily investing is the constant demand for housing in mature and developing markets. Even for those assets in more tepid markets, investors can optimize their acquisition and operational strategies to ensure controlled operating costs, top lease rates and minimal vacancy.