There is a wide range of commercial real estate categories to take into account when planning your investment strategy. When the economic winds shift or crises take place, multifamily real estate has time and time again proven to be one of the most resilient, stable and predictable asset classes in the industry. Multifamily is once again demonstrating these desirable qualities amidst the COVID-19 pandemic and its subsequent effects on the commercial real estate sector. The simple fact is that multifamily properties typically perform well in virtually any economic state, including recessions, temporary downturns and complete crashes. The explanation is equally straightforward: People will always need a place to live—and this will almost undoubtedly again prove the case in the remainder of the 2020 and beyond despite the unpredictable nature of the COVID-19 environment.
From a macro-level perspective, the performance of other commercial real estate asset types is intimately tied to the business world and overall economic conditions, not individuals and their preferred lifestyles. The sources of multifamily property success are noticeably unique relating to office or industrial spaces. The main driver for office investment returns is job growth, which is derivative of the state of the economy, inflation and interest rates. Industrial sector health is influenced mainly by overseas competition, tariffs and gross domestic production. Retail space success is reliant to online shopping activity trends. For multifamily real estate, none of these factors have a measurable impact on the sector’s performance.
When the market takes a nosedive or there is an economic crisis, people change their priorities when it comes to their basic needs. When funds are stretched, it’s hard to name more essential concerns as sustenance and shelter. If individuals are forced to make the call as to where a finite amount of capital is to be directed, the allocation for shelter registers high in terms of prioritization. This accounts for the fact that in past instances of economic turmoil rental volume in the midmarket apartment segment of the market has proven resilient—and is again doing so during the fallout from the coronavirus.
That is not to say that rent doesn’t always display positive growth during times of economic struggle, but history has indicated that it rarely decreases. Between the years of 2003 and 2008, there was stunted rent growth in the apartment space. Financing accessibility was at a premium and individuals were opting to purchase houses as opposed to renting. Following the Great Recession, this trend experienced a complete reversal—with many former buyers becoming renters once more. Even over the course of the muted rent growth period, it never went into the red, they just increased slower than they did in the build up to the market collapse. Apartments then were at the head of the pack in the post-crash recovery period, embarking on a decade of historic rent growth performance.
Regardless of the current state of the economy, investors should still be proactive in conducting their due diligence. Just as is the case with any investment type, there are certain factors to consider. If you are new to investing in the multifamily real estate space, you have the option of purchasing stock in a REIT, conducting passive investments via a sponsor or acquiring your own property. Regardless of which form of investment you choose, it is important to do your homework up front. A portion of new investors take the REIT route. They need to be aware of the investment firm’s past performance, leadership profile, and existing business plan prior to acquiring stock. Alternatively, passive investing is a popular choice amongst new real estate investors. This can range from giving money to a family acquaintance or contributing towards a large funding entity. Again, past performance and future projections should be carefully examined before an investor commits.
All investments—both in the real estate industry and in all other sectors—carry with them a certain degree of inherent risk. The good news is that multifamily investments typically have a comparatively lower risk profile with regards to other product categories in both times of economic prosperity and turmoil.
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