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Recession Watch and Multifamily
The Great Recession
Anyone who has seen (or read) The Big Short has some level of familiarity with what caused the Great Recession. The meltdown of the financial industry and American real estate market led to the bailouts of major American corporations, particularly banks, and some two years of depressed growth in developed economies. Depending on your perspective, measures by the cabinet of then–President Barack Obama or organic growth led the American economy into a period of unprecedented expansion. Since June 2009, the economy has continued to expand for the longest uninterrupted period in its history. Debate rages as to the solidity and value of the growth, and since the recession ended economists and government officials have remained wary of another potential downturn.
Recession Watch Today
There is no shortage of predictions about when and how economic disaster will strike again. In January, financier and analyst Gary Shilling predicted a substantial recession this year, and others predicted downturns in 2017 and 2018. To see what the economy has in store, some economists swear by the skyscraper index, and others insist that monitoring the volume of large discretionary purchases can provide a window to the future.
These predictions serve as constant reminders that no one sees the future with total clarity, and that a downturn can come at any time. The competing noise of thousands of indicators can cloud what is actually happening. For the savvy multifamily investor, there are two critical takeaways: choose some indicators you think will provide meaningful warnings, and build a portfolio that will endure during bad economic conditions.
Multifamily Strategies Before and During a Recession
Multifamily investments maintain a reputation as a recession-resistant asset class, as the need for housing is not contingent on a healthy economy and because the relatively short lease terms—a single year—provide landlords with flexibility. That said, no asset class can survive a recession untouched. Multifamily owners and developers should keep a few strategies in mind to defend against a recession before it arrives and to boost profits once it has.
During a period of economic growth, when acquisitions are proceeding normally, investors should focus on diversifying their portfolio. In the context of institutional apartment assets, multifamily owners can act on this advice in a few ways. Purchasing assets in the various multifamily verticals—student housing, senior living, and more traditional, garden-style developments—can guarantee income from demographic groups with diverse backgrounds. When considering which assets to acquire in each vertical, investors should search for areas where demand has remained persistent (or, ideally, high) through several economic cycles either due to the relative scarcity of housing or other economic drivers.
Once a downturn has arrived, multifamily has a critical advantage over the office, industrial, and retail asset classes: hundreds of tenants, rather than one, two, or perhaps a dozen. This means hundreds of diverse income streams and the luxury of focusing on the property as a whole in times when securing capital is difficult, rather than upgrading the facilities for a single tenant who may choose not to renew. Adding amenities can improve tenant attraction and retention. For those with access to capital, new amenities might mean expanded fitness facilities, a new pool, or electronic key fobs. For owners who do not want to spend, expanding amenities can remain virtual: companies like Hello Alfred partner with landlords to provide app-based services such as dog walking, dry cleaning, and grocery delivery. Beyond expanding amenities, owners can look into new streams of revenue. Regulations vary widely state to state and municipality to municipality, but short-term rentals through a partnership with a company like Airbnb can boost profits if vacancies become high.
Economists and prognosticators cannot predict a follow-up to the Great Recession perfectly. Prudent, diverse investments purchased in a healthy economy can help soften the blow of a downturn. Differentiating one’s apartment complexes after the downturn has arrived can further insulate profit from harm, and guarantee that once the recovery begins, your portfolio will continue to grow.