I recently came across an article from a company called Janover about mult-family investing during a recession. Enjoy!
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.
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.
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.
Great 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.
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.
Credit: Janover Multifamily Loans
On behalf of the Sovereign Sage Team