Taking the Long View (August 2022 Insights)
We are fielding many questions from our investor base regarding the current economic headwinds and how those impact the multifamily real estate market. Some of the most common ones are:
If we are going into a recession, how will our current investments hold up?
Is this still a good time to invest in new opportunities?
From a multifamily real estate perspective, does it really matter if we have a recession or not?
Historically, multifamily real estate holds up very well during times of economic hardship as compared to other asset classes. One key indicator of multi family performance during recessionary periods is loan delinquencies. An analysis of Freddie Mac's multifamily loan database shows that during the housing crisis (2007-2009) multifamily loan delinquencies hovered below .2%, while single-family loan delinquencies peaked at 11.4%, indicating very few multi-family owners had to sell off, or take other drastic measures, due to hardships.
Additionally, in 2020 during the pandemic, single family delinquencies peaked at 2.7% while multi-family reached peak delinquencies of .15%, again supporting our conclusion. Also noteworthy is that, because of rising interest rates, buyers are less inclined to purchase during these times, preferring instead to turn to multi-family for rent, at the very least keeping demand steady and potentially increasing it.
From a macro perspective, multifamily real estate continues to be a very favorable place to invest based on:
Very low housing stock in the U.S, creating a fundamental low supply / strong demand scenario that will not improve soon
Rising interest rates reduce homeownership affordability and keep folks renting
Wage growth has been robust which has offset much of the rising rents so far
COVID-19 spawned a mobile workforce that can live and work anywhere, which drives more people to rent vs. buy given the increased flexibility
The flipside is the pace and duration of rising interest rates does impact the cash flow of our properties. Operators do have caps in place so rates can only go so high. For now, the operators by and large are saying current operations, occupancy and rents have never been stronger, which is helping offset the cost of rising interest rates.
That said, we are in discussion with all operators to ensure they are preparing for any softening in rents (joblessness increasing / affordability) coupled with sharply higher rates (debt costs) if the Fed needs to continue to tighten over a longer period. We will outline more of those plans in our upcoming newsletters.
In conclusion, we don’t believe investors should be concerned, and we advise taking a long-term view with your current/future holdings with Limitless Investing and the operators we partner with. The key is not to sell in a downturn and weather the storm. So yes, recessions matter but not nearly as much as people may think.
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