No. We actually think it is a great time to invest in real estate! Multifamily thrives during rough economic times. Read on for statistics and details of why that is.
It’s a Bad Time To Have Your Money In Almost Everything
It’s hard to find the right place to put your money in 2022:
Keeping cash in the bank is a big risk now. At 7.9% as of February 2022, inflation is at the highest it’s been in 40 years, so the power of the dollar buys less than what it did a year ago.
Stocks (especially tech) and crypto are extremely volatile right now. Surprisingly, stocks are so volatile that over the past 5 years, Bitcoin has been less volatile than the Nasdaq 100.
The war in Ukraine has placed uncertainty in agriculture related commodities.
Bonds are yielding next to nothing (historically 0-3% in the US)
Mortgage interest rates are rising and will continue to rise at a rapid pace, so real estate is at risk
In the past 40 years, there have been 5 recessions
Iran/Energy Crisis (July 1981- Nov 1982) - New Iran power regime + The Fed tightened monetary policy to stem inflation
Gulf War (July 1990 to March 1991) - Inflation rose from 1986 to 1989, so the Fed raised interest rates. At the same time, oil prices spiked.
Dot Com Bust (March 2001 – Nov 2001) - Dot Com bubble burst + 9/11 attacks
Great Recession (Dec 2007 – June 2009) - Subprime mortgage crisis and housing bubble burst
Covid-19 Global Pandemic (Feb 2020 – April 2020) - Travel restrictions and quarantine requirements slowed economic activity
In March 2022, Ed Harrison of Bloomberg dubbed this “The Everything Risk”.
Amidst recessions and uncertainty, many investors found financial security by investing in multifamily apartments. Most recession resistant industries provide our basic needs and necessities such as water, food, clothing, and shelter. In a bad economy, individuals cut back on their luxuries, but continue to spend for their basic needs. As a result, multifamily is a recession resistant asset.
Multifamily could be considered an antifragile, cash flowing asset.
“Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.” - Nassim Nocholas Taleb, Antifragile: Things that Gain from Disorder.
Gold, silver, and other precious metals are investment safe havens, but they don’t generate cash flow, nor do they get better after market shocks because they stay at the same relative value. Multifamily on the other hand comes out as a clear winner among other assets when it comes to antifragility.
Multifamily Apartments vs. Single Family Homes vs. Stocks during a Recession
In the Subprime Mortgage Crisis of 2008, Multifamily values were affected less than Single Family Homes and Stocks (Nasdaq 100 and S&P 500), and Multifamily values improved to stable levels in a shorter period. Tech stocks remained volatile but stayed on the positive side of the graph. Single Family Homes didn’t remain on the positive side of the graph until 2 years after Multifamily stayed positive. Finally, when comparing the S&P 500, multifamily apartments recovered to its pre-Recession value more quickly and ultimately outperformed it.
Multifamily Apartments vs. Other Commercial Real Estate
Since recessions lead to layoffs and cause economic hardships, some other forms of commercial real estate are affected. It’s important to understand that even though apartments are classified as Commercial Real Estate, apartments behave very differently and better than other Commercial Real Estate assets – during and after a recession. For example, when there are less employees at a company, or a company goes out of business because of a downturn in the economy, the properties associated with those shocks take much longer to recover than residential properties. As the economy grows and gets stronger, there is still a need for housing, so apartments recover faster and thrive when the economy recovers.
Multifamily: Class B Properties Perform Best In Recessions
Class A properties are properties that are new and luxurious with amenities such as in-unit washer/dryers, dishwashing machines, community pools and gyms, modern kitchen designs, and well landscaped grounds. These properties are in wealthy neighborhoods and may even be next to a local Starbucks or Whole Foods. Irvine Company Properties would be considered Class A properties.
Class B and C properties are levels below Class A properties. Class B and C properties may have some amenities, but they are older, smaller, and often have some maintenance or improvements that need to be done and are often in areas that are lower income. Because the properties aren’t as luxurious, they don’t have high rents and attract tenants that appreciate affordability over luxury.
Because Class B and C properties are more affordable in general, when there is an economic downturn, many individuals that were living in Class A properties opt to live in Class B properties, and Class B tenants may opt to live in Class C properties. When there is an economic recovery, some shift occurs between the properties again, and tenants from Class C properties may opt for Class B and so forth. Because of this, there is usually low vacancy rates in Class B multifamily properties during market shocks. This also means that there is also less risk in Class B properties.
Interested in a Portfolio That Thrives Through Recessions?
There are many assets that you can invest in, but everything is currently at risk. We are experiencing situations that triggered the past 5 recessions in the United States. Are you prepared for the next one?
Diamond Point Homes focuses on adding value to Class C properties with some simple conveniences that make life nicer for their residents, ultimately bringing it up to a Class B property. We build a 2-5 year business plan to help us achieve our goals and succeed.
Board of Governors of the Federal Reserve System (US), Interest Rates and Price Indexes; Multi-Family Real Estate Apartment Price Index, Level [BOGZ1FL075035403Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL075035403Q, April 6, 2022.
S&P Dow Jones Indices LLC, S&P/Case-Shiller 20-City Composite Home Price Index [SPCS20RSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SPCS20RSA, April 6, 2022.
NASDAQ OMX Group, NASDAQ 100 Index [NASDAQ100], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/NASDAQ100, April 6, 2022.