Updated: Apr 5
Uncovering the Potential Long-Term Benefits:
The global economy is heading towards another recession, and the real estate market is expected to take a hit as well. Multifamily real estate investing is no exception, but the impact it will face this time around may be different from the 2008 recession. In this article, we will compare the 2008 recession to the upcoming one and discuss the direction the multifamily real estate market is likely to take.
Contrary to popular belief, the upcoming recession could potentially have a positive impact on the multifamily real estate market in the long term. We will get to that shortly. First, lets compare today to The Great Recession of 2008:
The 2008 Recession
During the 2008 recession, the real estate market was hit hard, and the multifamily sector was no exception. The subprime mortgage crisis resulted in foreclosures, and the housing market saw a sharp decline. As a result, rental demand increased, and the multifamily market actually saw a boost!
The Upcoming Recession
The cause of the upcoming recession is different from the 2008 financial crisis, but the impact it may have on the multifamily real estate market could also be different. As we come out of the pandemic and people start heading back to work, as well as the tech industry making their massive layoffs, it appears that job losses, might just become a thing of the past. Meanwhile, interest rates are rising at a pace faster than many of us have seen in our lifetimes, which is making home buying more expensive and renting more attractive.
Despite the potential short-term decline in rental demand due to financial insecurity (real or anticipated), the long-term outlook for the multifamily real estate market remains positive. The pandemic seemed to be nothing more than a hiccup for the demographic shift away from urbanization. The increasing preference for rental housing in walkable locations over homeownership outside of populated metro areas are expected to drive demand for multifamily properties in the future. Furthermore, with interest rates stabilizing with the potential of the Fed to even cut rates in the next 6-12 months, borrowing for multifamily real estate investments is becoming more attractive, providing opportunities for growth and increased profitability for anyone with a long term view .
Comparing the Two Recessions
When comparing the 2008 recession to the current one, it's important to keep in mind the different stages of the market cycle. In 2008, the real estate market, including the multifamily sector, was at its peak, leading to a significant drop in values. This time around, the market has already corrected from its peak and is in a more stable phase. As a result, it is expected that the impact of the upcoming recession on the multifamily sector will be milder, and there will likely be less of a drastic drop in values. The market has already absorbed some of the shock and has corrected, so it is no longer starting from the summit of the mountain.
Impact on Occupancy and Property Values
According to a report by the National Multi-Housing Council, during the 2008 recession, the multifamily sector saw a decline in occupancy rates of approximately 2% in 2009. In comparison, during the current market cycle, the occupancy rates have remained stable, and it is expected that any decline in occupancy will be limited to 1% or less.
In terms of property values, during the 2008 recession, the value of multifamily properties declined by approximately 8%. In contrast, during the current market cycle, it is expected that property values will decline by 3% or less.
A Contrarian View
The upcoming recession could potentially have a positive impact on the multifamily real estate market in the long term. The recession is expected to result in a slowdown in the construction of new properties, which could lead to a shortage of supply in the future. This shortage could drive up rental rates and property values, making multifamily properties even more attractive to investors. In addition, during a recession, investors tend to shift their focus to more stable and secure investments, such as multifamily properties, which could lead to increased demand and further drive up values. While the short-term impact of the recession on the multifamily real estate market may be negative, in the long term, it could provide opportunities for growth and increased profitability.
Conclusion: Why I am Still Confident!
I have to say, the upcoming recession may shake things up a bit, but it won't stop the multifamily real estate market from thriving in the long run. As a multifamily apartment investor myself, I have confidence in the stability and resilience of this sector. Sure, there may be a short-term dip in rental demand due to job losses and financial insecurity, but that's just temporary. The truth is, the demographic shift towards urbanization and the growing preference for rental housing are driving forces that will only continue to boost demand for multifamily properties in the future. So, don't let the recession scare you, because the long-term outlook for multifamily real estate investing is bright and full of opportunities.
By Eric Johnson, Full Time Investor & Co-Founder of Elevation Equities