With all the craziness going on in the world these days, many economists believe that we are heading for an economic recession. To be clear, although many of us are still scarred from the Great Recession back in 2008-2009, it is not necessarily a terrible thing for an economy to endue some low points from time to time in order to somewhat reset itself and find a sustainable path forward. But the term “recession” still gives us pause, and makes us question many things, including whether our investments are sustainable or not.
Multifamily real estate, which includes apartment buildings and other properties with multiple units, has historically performed well during economic downturns or recessions, as many people predict will be coming soon, if not already officially here. One reason for this is that rental demand tends to increase during difficult economic times, as more people are unable to afford to buy homes. It’s fairly obvious to think about, but of course people will always need a place to live, regardless of the state of the economy. Data from prior recessions, in fact, shows that the multifamily sector consistently outperformed other real estate asset classes. According to a 2019 report by CBRE (a global leader in commercial real estate services and investment), multifamily rental rates exceeded those in the office and industrial sectors in the 2001 recession and exceeded all major property sectors, including office, industrial and retail, during the Great Recession of 2008-2009. In 2008-2009, single-family housing was devastated. But compared to office, industrial and retail, multifamily experienced the lowest level of rent decline and shortest period until rents reached their prior peaks, according to the CBRE report. One reason is that multifamily properties generally have lower vacancy rates than other types of real estate, and several vacancies in a 100-unit complex isn’t great but hurts a lot less than a single vacancy in a single-family residential home. These factors can make multifamily real estate a more stable investment than many other available options in both high and low economic cycles. Even if a recession causes some tenants to default on their rents or move out, landlords can still rely on the income from other units to help cover their costs. The location of the multifamily real estate can also play a significant role in its performance during recessions, of course. Properties located in areas with strong job markets and a diversified economy are less likely to be affected by recessions. On the other hand, properties located in areas that are heavily dependent on a single industry or in very small tertiary markets can be more vulnerable to economic downturns. Overall, multifamily real estate has historically been a relatively stable investment during economic recessions, but it is of course not immune to the effects of economic downturns. My personal thoughts are that if investing with a medium- to long-term time horizon in mind, it’s never a bad time to invest in a strong, cash-flowing asset. Of course, not every investment fits this criteria, so being patient and waiting for the right investment opportunity is paramount, and especially so during general economic downturns. In conclusion, multifamily properties have been known for their resilience during recessions, providing a steady income stream, with lower vacancy rates than residential housing. However, as with any investment, it's important to research and understand the specific market conditions before making a decision.