Is Multifamily Truly Recession Resistant?
Investor 路 Apex, NC 路 Member since 2018 路 253 posts 路 215 votes
Is Multifamily Truly Recession Resistant?
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Apartment Syndicator 路 Charleston, SC 路 Member since 2017 路 519 posts 路 631 votes
6y@Ryan Daigle and @Spencer Gray I think that both of you make good points under normal circumstances. However, this recession will be far from normal. It's the first time in the history of our country that a fully government created and government forced recession will occur. The government has ordered many people to stop working by virtue of them shutting down so many public places. The government is going to allow deferred rent payments and deferred evictions because of the scenario. The government is basically giving said people an allowance through quantitative easing because of such.
Long story short is that the government is in COMPLETE control of this one and the rules are very different than they've ever been in the past. With the rules that are temporarily in place, I don't believe that any property is truly recession resistant because the government has found a way to make the best recession resistant asset in the history of the world very vulnerable.
28 Replies
- Syndication Expert and Investor 路 Indianapolis, IN 路 Member since 2016 路 591 posts 路 808 votes6y
@Ryan Daigle I think you are correct in your analysis. We are most concerned with out assets with more blue collar and lower income residents (C and B- assets).
Multifamily is still recession resilient but I'm not sure anything is pandemic resilient.
- Apartment Syndicator 路 Charleston, SC 路 Member since 2017 路 519 posts 路 631 votes6y
@Ryan Daigle and @Spencer Gray I think that both of you make good points under normal circumstances. However, this recession will be far from normal. It's the first time in the history of our country that a fully government created and government forced recession will occur. The government has ordered many people to stop working by virtue of them shutting down so many public places. The government is going to allow deferred rent payments and deferred evictions because of the scenario. The government is basically giving said people an allowance through quantitative easing because of such.
Long story short is that the government is in COMPLETE control of this one and the rules are very different than they've ever been in the past. With the rules that are temporarily in place, I don't believe that any property is truly recession resistant because the government has found a way to make the best recession resistant asset in the history of the world very vulnerable.
- Investor 路 Apex, NC 路 Member since 2018 路 253 posts 路 215 votes6y
@Charles Seaman I think we're in violent agreement that this will be a different kind of recession (though they're always different in some ways from the last one). I just think one way I think it will be different is that C-class won't be as safe of an asset class as expected during the downturn. And I say this as an owner of C-class properties 馃槺
- Apartment Syndicator 路 Charleston, SC 路 Member since 2017 路 519 posts 路 631 votes6y
@Ryan Daigle I also own C-class and fully agree with you. However, it almost seems like the rules of the game have totally changed this time, so I think that it'll be a very different experience from any of the previous ones in our nation's history.
- Real Estate Broker 路 Kansas City Metro 路 Member since 2015 路 2k+ posts 路 1k+ votes6y
@Ryan Daigle I think predicting what will happen is fun and hard and all things exciting but I think the smart thing to do is to continue doing what we are doing. People will always need places to live. Stay the course and slow down. I do think it is more recession proof than most other investments.
- Cincinnati, OH 路 Member since 2020 路 4k+ posts 路 3k+ votes6y
@Ryan Daigle one fault I see in your assumptions is that the higher earners, class A tenants won't be effected. While to a certain degree I agree with you, when life shuts down, like it has for the last week, it can effect all of us.
If this is short lived (please let it be short lived), I totally agree. But if this stretches on for months and months, businesses will all have to adjust and lay people off. If RE is effected with increased vacancy, the professionals that work in it lose their jobs. As I have been talking with investors, the historic trend is when these higher paid positions lose, or are in fear they may lose, their job, they will step down from the Class A to Class B product.
But again, this is all assuming this downturn lasts longer than a few months. If not, yes the Class C/D will be the hardest hit, since generally low wage earners are the hardest hit first with any downturn.
- Investor 路 Apex, NC 路 Member since 2018 路 253 posts 路 215 votes6y
@Evan Polaski careful now! I didn't say class A tenants would not be affected - just not as much as C class tenants.
Still just a guess based on a situation I have no control over. I agree that very few people will emerge unscathed, though.
- Cincinnati, OH 路 Member since 2020 路 4k+ posts 路 3k+ votes6y
@Ryan Daigle true. I read into your comment "Whereas the folks in the A-class assets will weather the storm much better and not need to step down at all." with the assumption that stepping down is same as unscathed. But that is not what you said, and I can see how that is not what you meant either.
- Sherman Oaks, CA 路 Member since 2013 路 3k+ posts 路 2k+ votes6y
Section 8 LL might be very resistant. Retail and office space could be the most challenged. If we get lay offs that are slow to come back then maybe all classes of multis get a stress test. Idk if the most prime desirable stuff will be effected as much but that is a very small % overall. Good luck!
- Rental Property Investor 路 Durham, NC 路 Member since 2016 路 7k+ posts 路 7k+ votes6y
@Ryan Daigle I agree with you. C Class and commercial real estate (retail) will get hit hardest
- 6yRick MartinPro MemberRental Property Investor 路 Redondo Beach, CA 路 Member since 2017 路 411 posts 路 477 votes
@Ryan Daigle I agree the first class to be hit will be C. Restaurant servers, cooks, those in retail, hotels and transport are literally out of work right now. Some industries fit the remote worker better, but their clients will begin to suffer, and thus it will become systemic. I would say B is and always has been the most resilient pocket. The eviction restrictions are a free ticket not to pay rent, so hopefully these lockdowns are effective. Finding a vaccine? That may take a while. Up your economic vacancy significantly, and let鈥檚 hope it doesn鈥檛 last beyond a few months.
- Rental Property Investor 路 St. Paul, MN 路 Member since 2016 路 3k+ posts 路 3k+ votes6y
There is a reason why class A cap rates rarely get over the 5 cap range. They are the most stable in all market cycles, easy to manage, low maintenance, have the highest degree of appreciation and bounce back the quickest after a recession. A class doesn't step down to B class. They may cut out going out to eat for lunch and dinner and having a Starbucks twice/day, but most will stay in their A class apartment - possibly with a roommate. Depending on how deep this goes, all will be affected, but C and B will get the brunt of it, like all recessions before.
- Developer 路 Charlottesville, VA 路 Member since 2018 路 4k+ posts 路 4k+ votes6y
Good news is this is a temporary situation. All of this is going to blow over and the the banks are going to work with you when you need to defer payments. Even up to a year if necessary. Very different than 09 when banks were foreclosing on everyone.
- Specialist 路 Kansas City, MO 路 Member since 2018 路 331 posts 路 148 votes6y
"It's hard to make predictions, especially about the future" - Yogi Berra
I agree with the predominant sentiment that while we can try to take away lessons from the last recession, this time will likely have a different impact and will require a different approach to weather the storms.
At the peak of the last recession, foreclosures boomed and the need for multi-family "workforce housing" increased dramatically. Vacancies went down, rents stayed flat or, in some cases, increased. - Rental Property Investor 路 Central, FL 路 Member since 2016 路 950 posts 路 821 votes6y
It鈥檚 a whole different kind of scenario, but so is each downturn. I agree with @Account Closed that STR wasn't as popular back in 2008 as it is now. So anyone who owns them that hasn't properly prepared with cash reserves will hurt the most immediately. That sorta goes for anyone.
There鈥檚 a reason people hurt two weeks after a crisis happens, because they live paycheck to paycheck. Same goes for a investor that lives on their cash flow with no cash reserves that would see them thru the high vacancy or for this case a possible high rate of non-paying Tenants.
Just a opinion of course. Who knows what will happen tomorrow. I know A business is quick to fire and slow to hire.
- Sherman Oaks, CA 路 Member since 2013 路 3k+ posts 路 2k+ votes6y
Originally posted by @Account Closed:
We have a new sheriff in town. Its STR owners who will be hit hardest. Right here right now being annihilated.
Last recession multis lost 40% on average and sfrs lost 32%. There were still exceptions where as I think in LA multis did better than sfrs. Bottom line both tanked big.
- Real Estate Broker 路 Canton, GA 路 Member since 2010 路 15k+ posts 路 11k+ votes6y
Last downturn multi-families got crushed just like anything else.
You have economic cycles peak to trough and then within that have asset classes that cycle at different intervals. Typically first to fall is SFR properties, then multifamily, then commercial but this virus is different.
On the commercial retail side I still have clients buying it is a (flight to quality) meaning most want investment grade tenants now even if a lower cap rate. They do not want to touch small to medium size franchisee or mom and pop tenants for STNL. The only way I would buy such a property is if rent is way low below market and could back fill area with regional or national tenant at much higher rates. Tenants are going to try and take advantage whether residential or commercial asking for concessions. That is when the landlord could possibly also ask for personal financials and if commercial business financials as well as personal.
There is a difference between having the cash and not wanting to spend the cash as a tenant and TRULY having losses and little reserves and needing the landlord to do a temporary workout.
I think residential 1 to 2 property landlords and also residential agents could get pounded with this downturn. You will have some home buyers not feeling good even with low interest rates to make such a large purchase. With residential agents they make less per transaction so have to do a lot of velocity to get by.
With apartments I was around for the least down cycle and all were affected. C class tends to be most heavily affected and below. B class if you have 50% or less of market rents then likely most tenants stay and pay because they have one of the best deals in town. If a landlord owns a multifamily complex where they pushed rents hard for the value add strategy those are really going to be hurting as tenants look for cheaper places to live. I saw last downturn multifamily landlords competing against each other to maintain occupancy levels to service the debt loads of the properties. They had to do waiver of security deposit, half or first months free rent, rent specials for flat to no rental increases,etc. That is why I can find it amazing that some people think multifamily is a can't lose asset class. ANY asset class an investor can lose money in. Someone telling otherwise is blowing smoke you know where. The key is to try and buy right to put odds more in your favor but a guarantee of a positive outcome doesn't exist.
Right now if someone has class A apartments in Texas they might be in some trouble. Most jobs are oil and gas execs and with oil down really low those companies are not making much to any profit and can't afford to keep paying those high salaries. I saw it last time that happened when oil dropped. Lower gas prices which can be a negative to the oil industry job areas in some parts of Texas is usually a positive across the country because people can travel cheaper and spend that money on other items BUT this virus thing has negatively affected that.
I hope the virus peaks soon and this warm weather helps (flatten the curve) faster,slow the spread , and the virus goes away so economy can get back to recovery sooner.
- Rental Property Investor 路 Maryville, TN 路 Member since 2009 路 529 posts 路 414 votes6y
@Logan Freeman checked the fred site... nationally vacancies went UP to 10%.
The virus crisis is not going to be a big deal , but this will...
https://www.oftwominds.com/blogmar20/repricing3-20.html?fbclid=IwAR2hX-nx2soRXb2nWuuC65uYuOqkIVi9C10PZAIUPzzKLrGQY340QIpGRb4
Please respond if you have a counter to this article, Has the everything bubble popped? - Sherman Oaks, CA 路 Member since 2013 路 3k+ posts 路 2k+ votes6y
Originally posted by @Joel Owens:
Last downturn multi-families got crushed just like anything else.
You have economic cycles peak to trough and then within that have asset classes that cycle at different intervals. Typically first to fall is SFR properties, then multifamily, then commercial but this virus is different.
On the commercial retail side I still have clients buying it is a (flight to quality) meaning most want investment grade tenants now even if a lower cap rate. They do not want to touch small to medium size franchisee or mom and pop tenants for STNL. The only way I would buy such a property is if rent is way low below market and could back fill area with regional or national tenant at much higher rates. Tenants are going to try and take advantage whether residential or commercial asking for concessions. That is when the landlord could possibly also ask for personal financials and if commercial business financials as well as personal.
There is a difference between having the cash and not wanting to spend the cash as a tenant and TRULY having losses and little reserves and needing the landlord to do a temporary workout.
I think residential 1 to 2 property landlords and also residential agents could get pounded with this downturn. You will have some home buyers not feeling good even with low interest rates to make such a large purchase. With residential agents they make less per transaction so have to do a lot of velocity to get by.
With apartments I was around for the least down cycle and all were affected. C class tends to be most heavily affected and below. B class if you have 50% or less of market rents then likely most tenants stay and pay because they have one of the best deals in town. If a landlord owns a multifamily complex where they pushed rents hard for the value add strategy those are really going to be hurting as tenants look for cheaper places to live. I saw last downturn multifamily landlords competing against each other to maintain occupancy levels to service the debt loads of the properties. They had to do waiver of security deposit, half or first months free rent, rent specials for flat to no rental increases,etc. That is why I can find it amazing that some people think multifamily is a can't lose asset class. ANY asset class an investor can lose money in. Someone telling otherwise is blowing smoke you know where. They key is to try and buy right to put odds more in your favor but a guarantee of a positive outcome doesn't exist.
Right now if someone has class A apartments in Texas they might be in some trouble. Most jobs are oil and gas execs and with oil down really low those companies are not making much to any profit and can't afford to keep paying those high salaries. I saw it last time that happened when oil dropped. Lower gas prices although which can be a negative to the oil industry job areas in some parts of Texas is usually a positive across the country because people can travel cheaper and spend that money on other items BUT this virus thing has negatively affected that.
I hope the virus peaks soon and this warm weather helps (flatten the curve) faster,slow the spread and, the virus goes away so economy can get back to recovery sooner.
That about covers it. Sfrs might not get as hard % wise as last recession as I think lenders are going to suspend mortgage payments for at least a year. Idk if that covers non primary though. Perhaps they can come up with something for renters so multis can survive better too. NNN, some I imagine might have zero issues. Hopefully they get enough of those cures ready and we can cancel crisis.
- Rental Property Investor 路 Oakland, CA 路 Member since 2014 路 730 posts 路 1k+ votes6y
I鈥檓 wondering if I鈥檓 immune to this. I鈥檓 in a HCOL area and 90% of my rentals are Section 8. The overwhelming majority don鈥檛 work and are receiving some sort of gov鈥檛 assistance. The ones who do work are hourly/labor so I think they will be affected.
I have 6 months PITI as reserves for each property. Most are 30 year fixed; some are balloons due in 7-9 years. Cash flow average $500/unit after all expenses.
Should I start worrying? - Investor 路 Boston, MA 路 Member since 2015 路 1k+ posts 路 3k+ votes6y
Originally posted by @Joel Owens:
Last downturn multi-families got crushed just like anything else.
With apartments I was around for the least down cycle and all were affected. C class tends to be most heavily affected and below. B class if you have 50% or less of market rents then likely most tenants stay and pay because they have one of the best deals in town. If a landlord owns a multifamily complex where they pushed rents hard for the value add strategy those are really going to be hurting as tenants look for cheaper places to live. I saw last downturn multifamily landlords competing against each other to maintain occupancy levels to service the debt loads of the properties. They had to do waiver of security deposit, half or first months free rent, rent specials for flat to no rental increases,etc. That is why I can find it amazing that some people think multifamily is a can't lose asset class. ANY asset class an investor can lose money in. Someone telling otherwise is blowing smoke you know where. The key is to try and buy right to put odds more in your favor but a guarantee of a positive outcome doesn't exist.
Great summary of what really drives how "recession resistant" an asset is; not only the class, but the deal structure.
All is well and good if I own a great A class apartment building, but if I overpaid and my worst case pro forma plan has me pushing rents 3%/yr to meet the debt service when the Interest Only expires, the next 6-12 months are going to be rough. Or when I can't increase rents and economic vacancy rises, my cash reserves will get small quick. Then I go to the CapEx budget to stay afloat, but that's eating your seed corn and now the overall turnaround has to get funded from cashflow when things do turn around, but the increased time crushes return and investors don't like that at all.
In a lot of MF OMs I saw, it was taken as almost gospel that all rents could be brought to market within 8-16 months. Some GPs and LPS are about to learn that MF isn't all sunshine and rainbows.
- Specialist 路 Lancaster, PA 路 Member since 2018 路 152 posts 路 66 votes6y
@Ryan Daigle I agree. Multifamily is not completely recession resistant in this situation. C class will definitely be hit first, but this could extend up the spectrum depending on how long the lock downs persist. There is also the cause for concern of a significant influx of inventory ie. Investors looking to jump ship, and it's possible we may see a bit of oversupply which which may increase vacancy. In general, this is going to impact r.e for the next few years but the situation is still somewhat infantile and the ripple effect on r.e is always a delayed response. Retail tenancy is shook up, as well as hotels. Industrial remains resistant with slight up tick.
- Specialist 路 Lancaster, PA 路 Member since 2018 路 152 posts 路 66 votes6y
@Matt R. Very well said.
- Investor 路 Chicago, IL 路 Member since 2016 路 197 posts 路 105 votes6y
This is probably going to be the most unique recession that we have ever seen and I personally think that normal measures of classifying disaster based off of classes are not going to work, I think that it's more likely that this will be a case by case scenario depending on industries hardest hit and what mix of tenants you serve. Like some Class, A tenants could be hit extremely hard small business owners who no longer are getting revenue, class A or B tenants who have decent-paying jobs that industry basically shut down because of all this. We all know of the struggle coming that will face the class C sector but honestly, I feel it will case by case situation. Like for instance if you have a class c tenant that works at a grocery store they will not be affected because that sector will actually pick up during this time. Tenants who have government assistance also will not be affected by this. So what everyone must do is look at the scope of your tenants, stay as informed as possible about the economic impact your tenant may be experiencing and keep the lines of communication open as possible and be as forward-thinking as possible about solutions to what is going to a monumental collapse. Good luck to you all!
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