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Why Multifamily Is Safe During a Recession
While there are no absolutes in this economy, apartment properties are some of the safest investments out there. Find out why.
There’s a lot of talk of an upcoming recession. The markets have been down for a while. Interest rates are flying high, all to curb the highest inflation rates since the early 1980s. Hell, even Facebook — sorry, Meta — sacked more than 11,000 people in a single move in early November. Ned Davis Research is saying there’s currently a 98.1% change of a global recession.
Let’s be honest: Things aren’t looking great. It’s understandable if you’re feeling a bit woozy. But everything is probably going to be okay if you’re active in the multifamily sector — and are reasonably prepared.
Why Is Multifamily Real Estate a Safe Play?
There are a few reasons. Let’s get through them one at a time. Maybe they don’t all apply to you or your portfolio — but most of them definitely will.
Multifamily Properties Are Good Inflation Hedges
It’s difficult to count the number of articles out there in the CRE universe using the inflation hedge language (here’s our most recent). The reason so many people say it, though, is because it’s true. A multifamily investment really does enable you to worry a lot less about inflation. After all, when prices are going up, you can just raise your rents.
This is one of the asset type’s features, especially relative to other commercial real estate properties. With office and industrial properties, for example, leases are significantly longer term — up to 10 years, generally — and while those lease agreements may allow for annual rate increases, those are typically locked in well in advance. It’s hard to predict an inflationary environment like what we’re experiencing now.
But with multifamily rents, it’s different. You’re generally handling renewals once a year, giving you ample time to adjust your rates to changes in costs and market dynamics.
Housing Is in Demand — and a Recession Doesn’t Change That
We all know there’s intense, sustained demand for more housing. Economic downturns haven’t changed that in the past, and they won't in the future, either. A report from the National Multifamily Housing Council and the National Apartment Association highlights that at the national level, the country needs 4.3 million units by 2035 to meet housing demand. Even should the economy contract, that will still be true.
With that in mind, owning a share of the housing inventory makes good business sense. People always need a place to live, after all.
There are exceptions to this point, mind you. If the economy tanks, and you’ve got a portfolio of high-end luxury apartments in a market that can’t support those rents, you may have some challenges ahead of you. This bullet point is more for owners of traditional market-rate multifamily properties and workforce housing, not to mention designated affordable housing communities.
Renting’s Becoming More Popular
While most households do own their own homes (the St. Louis Fed pegged the homeownership rate at 66% in the third quarter), renting has become increasingly popular. That’s especially true for people under the age of 35. And it isn’t just young people who may be priced out of buying their own homes. More and more people are choosing to rent. That number will only increase during a recession. High interest rates don’t only hit multifamily investors, after all.
Financing Options Are Better
Yeah, it’s true. Interest rates are going up — everyone’s talking about it. But historically (and presently), interest rates are far lower for multifamily properties than virtually any other type of commercial real estate asset.
Why?
Well, you read the points above. Lenders are intimately familiar with all of these dynamics, too. The result is that multifamily loans have a far lower risk profile, generally speaking. So, while an office or retail financing package may command a high interest rate, apartment loans are almost always going to come in cheaper and better.
But it isn’t just that. The multifamily sector benefits from a wealth of loans specifically designed to reduce risk on lenders and provide better terms for borrowers. Consider any agency loan for a quick example. A Freddie Mac® financing package or a Fannie Mae® loan can generally allow borrowers like you to get some great terms. Sure, their interest rates are higher now than they were a year ago, but relatively speaking, these programs can offer terms that most conventional lenders wouldn’t dare to.
Same goes for HUD loans. Admittedly, there’s a lot of paperwork for some of these programs, and timelines can stretch to the horizon (and beyond), but the payoff — lower payments, longer terms, fixed interest rates, no recourse — is generally more than worth the effort.
Tax Benefits
Last but certainly not least, the tax benefits unique to multifamily real estate make investment in the sector awfully attractive — especially during a recession, when every dollar counts. Think of the bonus depreciation allowance from the Tax Cuts and Jobs Act, for example. Sure, that’s starting to phase out after December 2022, but it still can provide significant benefits until its elimination in 2027.
Then, of course, there are 1031 exchanges. With a 1031 exchange, you can essentially swap one property with another, similar property, deferring all of your capital gains in the process. It can be complicated, of course, but it’s generally not taxed as a sale so long as you exchange one asset with another broadly similar commercial property. This type of benefit isn’t exclusive to multifamily assets, of course, but it’s a key way to get more out of your apartment investment strategy.
So, Is Multifamily Truly Safe?
While nothing’s for certain, apartment buildings do have a leg up on most other types of real estate investment.
Think about the points above:
Multifamily rents can be raised faster than in most other sectors.
They’re always in demand (except, potentially, for some luxury properties in certain markets).
Renting’s also becoming more common by the day.
And then on the financing side, there are so many competitive options to choose from.
Don’t forget the major tax advantages.
What are the benefits of investing in multifamily real estate during a recession?
Investing in multifamily real estate during a recession can provide many benefits. For example, multifamily rents can be raised faster than in most other sectors, they’re always in demand, renting is becoming more common, there are many competitive financing options, and there are major tax advantages. The Tax Benefits section of the article from Multifamily.loans explains the bonus depreciation allowance from the Tax Cuts and Jobs Act, which can provide significant benefits until its elimination in 2027. Additionally, investors can take advantage of 1031 exchanges, which allow them to swap one property with another, similar property and defer all of their capital gains in the process. The article from CommercialRealEstate.loans titled Investor’s Guide to 1031 Exchange provides more information on this type of benefit.
What strategies can investors use to protect their multifamily investments during a recession?
Investors can protect their multifamily investments during a recession by diversifying their property types, considering alternative investments, reviewing their debt structure, and increasing their cash reserves. Additionally, they should focus on properties with strong fundamentals such as location, size, and tenant mix, and structure their deals in a way that makes sense from a risk/reward standpoint. For example, they should consider fixed-rate loans, which offer long-term stability, rather than short-term gains.
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What are the risks associated with investing in multifamily real estate during a recession?
Investing in multifamily real estate during a recession does come with some risks. For example, if the recession is worse than expected, it could lead to a decrease in demand for rental properties, resulting in lower occupancy rates and rental income. Additionally, during a recession, interest rates may rise, making it more expensive to finance a multifamily property. Lastly, if the recession is severe, it could lead to a decrease in property values, resulting in a decrease in the value of the investment.
However, multifamily real estate investments are generally considered to be a safe bet during a recession. This is due to the fact that multifamily rents can be raised faster than in most other sectors, they’re always in demand, renting is becoming more popular, there are many competitive financing options available, and there are major tax advantages.
How can investors maximize their returns on multifamily investments during a recession?
Investors can maximize their returns on multifamily investments during a recession by understanding their timeline, picking the right timing, and sourcing the best financing terms. Multifamily investments are likely to outperform other major asset classes during a recession, and investors can take advantage of this by raising rents faster than in most other sectors, taking advantage of the always-in-demand nature of multifamily properties, and taking advantage of the competitive financing options and tax advantages available.
What are the best financing options for multifamily investments during a recession?
Refinancing during a recession can be a great way to improve a property's cash flows and secure better loan terms. Some of the best financing options for multifamily investments during a recession include:
- FHA loans: FHA loans are government-backed loans that offer low down payments and competitive interest rates. They are often used for multifamily investments, and can be a great option during a recession.
- Bridge loans: Bridge loans are short-term loans that can be used to bridge the gap between the purchase of a property and the permanent financing. They are often used for multifamily investments, and can be a great option during a recession.
- SBA loans: SBA loans are government-backed loans that offer low interest rates and long repayment terms. They are often used for multifamily investments, and can be a great option during a recession.
- Mezzanine loans: Mezzanine loans are a type of loan that is secured by the equity in a property. They are often used for multifamily investments, and can be a great option during a recession.
For more information on these and other financing options, please visit our blog.
What are the most important factors to consider when investing in multifamily real estate during a recession?
When investing in multifamily real estate during a recession, the most important factors to consider are:
- Rent increases - Multifamily rents can be raised faster than in most other sectors.
- Demand - Apartments are always in demand, except for some luxury properties in certain markets.
- Renting - Renting is becoming more common by the day.
- Financing - There are many competitive loan options to choose from.
- Tax advantages - Investing in apartments offers major tax advantages.
It's important to note that while investing in apartments does seem like a safe bet, there is still a risk of things going wrong. To mitigate this risk, it's important to source the best financing terms and pick the right timing for refinancing. This article provides five ways to find the best multifamily refinance in a recession.
So, yes, investing in apartments does seem like a pretty safe bet. Could things go wrong? Sure. Absolutely. But even if the recession is worse than feared, multifamily investments are very, very, very likely to outperform any other major asset class.
What Do I Do Now?
Well, if you don’t own a multifamily property, you could buy one. Two, even. And if you’re already invested in the market, maybe it’s time to think about taking advantage of those financing options. If you’re on a floating-rate loan, or if your mortgage is getting closer to maturity, the next few rate hikes sure aren’t going to be much fun.
Whatever you decide to do, talking to the Multifamily Loans advisor team is a great first step. Throw your details into the form below. We’ll get you 10 soft quotes from 10 different lenders in 24 hours. Might as well see what’s out there, right?