NEW YORK , NY - While the COVID-19 crisis may indeed impact all sectors, the goal is to mitigate the risks of wealth loss. We all have learned that investing your hard earned money wisely is increasingly important in today’s ever-changing market. There is no doubt that our financial and global markets will be impacted, and the fear of a recession is no longer one of speculation but a reality.
Despite the uncertainty of today's market multifamily real estate investing remains resilient.
Real estate is a well-known U.S. investment type that has been used to build wealth for centuries and is sometimes referred to as recession-proof. But in reality, no investment, real estate included, is truly recession-proof. It boils down to the type of real estate investment you own and where the property is located. The markets that are being affected in “this” particular recession will directly affect how recession-proof the investment actually is.
We are forced to shift our focus to the merits of investing in property when the stock market moves into a sluggish cycle primarily due to the following:
- Property investments can produce stable income.
- Real estate may be less sensitive to volatility.
- Property may outperform stocks and bonds.
Full ownership of multifamily real estate enables you to own property that if it's not overly leveraged or mismanaged has minimal risk of being ceased or “lost to the bank”. Furthermore, it always helps to have a well-balanced portfolio with minimal debts and low leverage ratios, which refers to the balance of equity and debt the company or investment carries. Having less debt will increase your odds of being able to ride out the recession, especially if you have a healthy reserves ratio to cover unexpected expenses or sharp declines in your investment income.
The same cannot be said of financial instruments which are intangible and depend on the economic health of the organizations and financial institutions founding them. Additionally, there are so many influencers in the stock market that leave you subject to much more local and global economic exposure. On the contrary, real estate is inherently a tangible, “REAL” or “HARD” asset that will stay no matter the economic situation. Real estate prices can also decrease during crises, but unlike stocks, the capital initially invested cannot be entirely lost overnight. This is why real estate is considered a safe haven during crises and a long term wealth preservation and expansion platform. It is a secured, tangible investment with a concrete ownership registration which is widely recognized and historically taken anywhere from 2-6 months post-recession/crisis for multifamily to be affected. The “delayed effect” offers owners and operators more time to plan accordingly for the worst scenarios. Being flexible with your tenants during this time of uncertainty will help reduce vacancy and / or delinquency. If ABSOLUTELY needed, owners can sell any speculative assets while the market values are still supported to reduce debt and increase liquidity.
During these hardships, it is the tangible, full-ownership real estate properties which are considered a safe haven to secure one’s capital.
Part of what makes affordable multifamily recession resistant is that the workforce housing communities of our country are arguably the backbone of American and our socio-political system. Thus, our multi-family Class B affordable properties, also known as “quality workforce housing,” offer affordable housing options to hard working middle class people who seek a quality and safe place to call home for themselves and their families. This is all the more true during crises, whether it be Covid-19, the Great Recession, or otherwise.
Regardless of economic conditions, people need a place to live. Those who get displaced from homeownership and/or Class A rentals will move to more affordable Class B and C rental properties. At the peak of the last recession, foreclosures boomed and the need for multi-family rentals increased dramatically. Vacancies went down, rents stayed flat or, in some cases, increased. During the recovery through today, as housing trends continue to improve, the growing demand for more affordable housing also continues to increase.
“For that reason, it is the most recession resistant asset class. That is why investors continue to like multifamily. Even regulators in the banking sector treat multifamily risk differently than other real estate asset classes, and that is because it has an inherent risk aversion to a market cycle.” - Marc A. Hershberg, Founding Partner, Topaz Capital Group LLC.
According to recent reports from CoStar Data Analytics, Moody’s Analytics, U.S. Census PPR; rentals of multi-family properties continue to increase perhaps at different risk adjusted rates, despite the financial turbulence. Investors are continuously purchasing these properties at an expanding rate, even changing the definition of what they consider to be “core investments”.
Investors that typically invest in “prime Class A downtown towers” in major coastal cities, are now buying buildings that are in secondary markets offering more affordable housing. According to Ari Rastegar, in order to “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.”
“Class-B housing has historically been phenomenally durable. In the last cycle—and I don’t think we’ll have that kind of downturn again in our lifetime—workforce housing performed extremely well.” says Pat Jackson, Founder & CEO, Sabal Capital.
New Rental Habits:
Another factor in the increase of class B & C multi-family properties increasing vs. decreasing is the next generation workforce dubbed, “The Echo Boomers,”. These twenty-something millennials, in addition to singles and childless couples, want to rent and sometimes need to rent vs. buy. According to a June 2017 Multifamily Executive (MFE) report, there is now an oversupply of class A luxury properties sitting vacant because, simply, they’re too expensive. The younger workforce values experience over owning, so renting more affordable class B & C properties makes sense. Alongside working families, military households, and others who need more affordable housing, Class B & C properties always tend to be a wiser and a more “recession proof” investment option when compared to other real estate asset classes.
"When the stock market is doing poorly, investors who are looking for other opportunities find that real estate is a safe haven." says J. Etan Friedman, Founding Partner & COO, Topaz Property Partners LLC.
The coronavirus is impacting our economy unlike any recessions in history. Industries, such as travel, tourism, and hospitality, collapsed overnight, while other industries are relatively well in light of the economic turmoil. Currently, real estate investments like short-term vacation rentals, retail, office, and Class C rental properties are being hit the hardest -- with other sectors sure to be affected soon thereafter. While the current outlook of Multifamily real estate seems dim and unpromising, the underlying factors supporting the sector have never been stronger. By proactive measures and constant evaluation of assets, multifamily real estate investors should be optimistic of the sectors’ future even with the challenges facing the industry today.