5 Benefits of Multifamily Investing During a Recession
Despite the strong labor market, many economists are continuing to predict a recession in 2023 as the Federal Reserve stays on course to fight inflation with higher interest rates. Investors remain focused on the best options to protect and grow their money regardless of the economic environment. As many experts express expectations for a recession that may be mild and short towards the latter half of 2023, those planning various scenarios can look at the attributes of multifamily investing to understand some of its key benefits, outlined here in our latest 5 Trends Multifamily Investors Need to Know.
In a housing market where home prices are expected to continue to fall, most potential home buyers who are renting will stay in an apartment until prices stabilize. As home builders focus on exhausting existing supply with discounts and incentives, housing starts will likely fall, even as the population continues to grow, adding to pent-up demand.
For landlords, this means more demand for rental housing and placing a floor under asking rents due to increased competition. In addition, rental demand also increases in times of loan defaults and foreclosures for those who can no longer maintain payments in a declining economic climate. While defaults and foreclosures remain relatively low for now, they could rise if a recession leads to job losses and increased unemployment.
When demand is high and supply is limited, landlords can continue to adjust their rental rates to match market conditions, especially if inflation is high and maintenance costs are rising.
When property prices are under pricing pressure due to higher lending rates, investors can buy low and then refinance when rates decline after a recession has started, boosting returns. Rents, which rise during times of high inflation and are 40% of the Consumer Price Index (CPI), often maintain most of their gains unless a recession is deeper and longer.
Another strategy to refinancing when rates are low is reducing the term to build up equity faster or extend it to pull out cash while still maintaining an affordable monthly payment. That extra cash can then be used to return equity to partners, purchase more properties, or fund improvements while allowing the investment to benefit from the tax benefits of the higher loan amount. Although pre-payment penalties can add to this cost, refinancing strategically and rolling those costs onto the new loan when rates dip could still make sense, depending on an investor’s timeline and goals.
Because shelter is critical, apartments generally hold up better in recessions and adverse conditions than other types of commercial real estate categories. We saw this during the pandemic where rent collections remained rather stable at between 95 and 96 percent. Currently, office vacancies are rising as tenants look to reduce their footprints, improve efficiencies, and even move to Class A buildings with better locations and amenities. While the retail sector has rebounded strongly from the depths of the Covid-19 recession, the boost in online shopping for late adopters is likely here to stay. That will impact foot traffic at traditional malls, especially those in more urban settings. And, while the industrial sector is popular due to e-commerce warehouses, recent overbuilding by giants such as Amazon may mean a space glut in certain markets.
With multiple tenants, traditional multifamily properties offer more stability for landlords than single-family homes, since a vacancy here and there has a significantly less impact on overall cash flow. Larger properties also benefit more from economics of scale, thus reducing per-unit costs for maintenance, utilities, taxes, and management.
For multifamily investors, they can choose from two-unit duplexes to mini cities with hundreds of units and everything in between. This variety of options is unmatched by most other commercial real estate sectors.
Today’s multifamily communities are much different than those in the past, seeking to offer a more holistic approach to tenants’ needs with high-tech amenities, recreational facilities, and environmental sensitivity. Multifamily units are also increasingly targeted towards specific types of tenants, including young professionals, active adults over 55, and students.
When feasible, mixed-use communities are often favored for development by municipalities, which covet the sales taxes generated by commercial real estate lessees. Pent-up demand for apartments targeted towards low-income and the ‘missing middle’ of households who don’t qualify for subsidized housing, but still cannot afford market-rate rents, can also provide opportunities for investors. As opposed to the giant public housing blocks of the past, today’s subsidized housing units financed with Low Income Housing Tax Credits (LIHTC) are typically indistinguishable from market-rate units, and in some cases, can help boost values of surrounding neighborhoods.
In addition to the wide array of multifamily investment opportunities, investors can also take advantage of different types of financing options. For 2023, conforming loan limits for mortgages bought by Fannie Mae and Freddie Mac are nearly $1.4 million for up to four units, rising to nearly $2.1 million in high-cost areas. That’s great news for smaller investors.
Besides traditional market-rate loans, there are also a variety of multifamily loans through the Federal Housing Authority (FHA) programs, as well as bridge loans and Commercial Property Assessed Clean Energy (C-PACE) financing. For example, FHA has several programs available for new multifamily construction, substantial rehabilitation, acquisitions, and refinancing. For investors in need of a bridge loan, some options offer non-resource financing for up to 36 months at a loan-to-value ratio as high as 85 percent.
C-PACE (Commercial Property Assessed Clean Energy) financing combines public and private funds to improve energy efficiency in buildings as well as improving the systems and physical structure of existing commercial real estate properties. Currently available in more than half of U.S. states plus the District of Columbia, C-PACE works by levying special assessments which are paid back over time by being added to property tax bills.
