Five Ways Multifamily Real Estate Investments Can Benefit You Amid A Recession

Not all multifamily properties are the same, but the nature of the investment type means that there are similar trajectories with multifamily that make it a vital part of an investment strategy. With demand for rentals in residential buildings at a record high and inventory of affordable apartment housing at a historic low, the recipe for long-term multifamily property stability and growth is evident. 

Here are five reasons to invest in multifamily ahead of a recession:

1) Resilience and Diversification of Rental Income

Multifamily properties are not reliant on only one or a few tenants for rental payments. While other commercial properties like office, retail, and industrial may have significant ramifications if even a single tenant vacates their space, multifamily properties feature powerful and resilient income streams that are diversified over dozens or even hundreds of individuals with different sources of personal income. In the same way that investors enjoy exchange-traded funds (ETF’s) like the S&P 500 for their exposure to numerous companies and industries, multifamily investors also benefit from not being over-exposed to residents from just a few employers or industries.

For this reason, Breneman Capital avoids properties that are over-concentrated to a single employer or industry. We seek diversification, which is why we collected 99%+ of our rental income during the COVID-19 pandemic.

2) Multifamily Generates Strong Returns

In an internal study of historical real estate investment returns from the National Council of Real Estate Investment Fiduciaries (NCREIF), Breneman Capital uncovered that multifamily outperformed all other commercial property types from 1990-2020. This survey measured possible return scenarios for 3,5,7 and 10-year holding periods. Multifamily consistently provided investors with the highest average return and the least volatility over all other real estate asset classes, even during previous economic recessions. 

Average 7 Year Annualized Returns vs. Annualized Return Standard Deviation
1990-2020 (Data Source: NCREIF)

Moreover, when considering allocations of different asset types with a broader portfolio, it is imperative to understand how closely historical performance of an asset type correlates to that of another. This is especially important in the event of a recession; when one asset “zigs”, you want the other asset to “zag” in order to reduce downside. The chart below represents the correlation coefficients for the NCREIF Index against other market benchmarks. Nearly all of the coefficients are close to 0, meaning there is little to no relationship in the two assets’ performance. Thus, investing in multifamily real estate can maximize returns within an overall portfolio while reducing risk.

3) Fixed Rate Debt Service and Lease Terms Act as Hedges Against Inflation

The current economic situation that faces the US and overall global economy is worsened by soaring inflation. In layman's terms, inflation means that the dollars in your wallet today will buy you less tomorrow than if you spent them immediately. 

Yes, inflation does hurt purchasing power, big and small. However, mortgages on multifamily properties provide the desired hedge against inflationary pressures. 

Assuming a fixed-rate loan, a multifamily property owner may pay $50,000 in principal and interest every month. Even if inflation keeps rising well into 2023, the building owner would still pay $50,000 per month. So as purchasing power decreases due to inflation, multifamily owners continue to collect cash flow while making loan payments with “cheaper” money. 

Note: this depends on your loan type and interest rate.

Furthermore, more lenders are willing to lend aggressively on multifamily than other real estate types. Similarly, large institutions such as Fannie Mae, Freddie Mac, and HUD only finance residential properties and lend billions of dollars each year. This competition and additional funds in the multifamily debt markets enhance the interest rates and terms a borrower can receive, especially for an experienced owner and operator of multifamily properties.

In addition to the above, inflation can actually be considered a positive for the real estate market and multifamily investors. Multifamily owners can adjust their rental rates more frequently as inflation and demand increase as apartment leases are typically 12 months long. Multifamily has the edge over industrial, retail, and office because these asset classes typically have longer-term leases (with no or small yearly incremental rent increases), which makes it difficult to capture the inflation-adjusted rent.

4) Increasing Residential Rental Demand

A combination of rising mortgage interest rates, the fear of layoffs at large corporations, inflationary pressures described above, and declining disposable income have made the prospects of buying a single-family home a lot more difficult for some and impossible for many.  In addition, new home construction is slowing dramatically due to the high costs of materials and labor, and constrained supply chains.  

As a result, potential homeowners have no choice except to continue renting and put off homeownership. Those that purchase starter homes and experience severe economic hardship may be forced to sell and return to renting. 

This new trend of skyrocketing costs to buy a home is also occurring amid additional trends that have persisted for quite some time. Current renters are renting for longer. Homeownership rates are declining and people are waiting longer to get married and become parents, which expands the time in their lives when they typically rent, leading to a greater need for multifamily rental properties. Moreover, significant portions of the population are entering the rental market. Gen Z (i.e. people born between 1998 and 2012) makes up approximately one-third of the U.S. population and is beginning to enter the rental market. In addition, 10,000 individuals turn 65 years old every day in the U.S., and many seniors at this age tend to downsize from their homes and move to rental communities that offer flexibility and require less hands-on maintenance.

5) Multifamily Holds Up Better over the Long Term in Remaining Functionally Relevant

An investment in a multifamily property is an investment in the basic human need for shelter. Housing and food are two essential staples people will always need, even during economic hardship. 

People will surrender or curtail spending on entertainment, luxuries, eating out, traveling, and all other types of spending to avoid homelessness. This sociological situation is one of the main reasons multifamily has a proven track record of success during past recessions. 

“Everyone has to live somewhere” is the common saying, but the multifamily sector’s proven resilience to functional obsolescence should not be relegated to just an expression – we have data to back it up. For example, in a Breneman Capital study of over 300,000 properties, we measured vacancy rates for older generations of properties (built before 1991) against newer generations (built 1991-2010). Between 2014 and 2021, multifamily demonstrated the best fundamentals and performed 3x better than industrial, 6.5x better than office, and 8x better than retail.

Average Vacancy Rates of U.S. Properties 2014-2021 (Data Source: CoStar)

It Pays to be Prepared 

Reading about the global economic crisis, the legacy of the great depression, and long-term inflation is not leisure reading. Turning economic fear and concern into an action plan can position you to thrive during economic downturns.  

About Breneman Capital

Breneman Capital is a private real estate investment management firm specializing in the multifamily property sector.  Breneman Capital employs a deliberate investment approach, leveraging data analytics and proprietary technology to generate superior risk-adjusted returns for investors.

To begin receiving high-quality investment opportunities from us, sign up here today: