The economy has changed significantly over the past year. The Fed's drastic rate hikes in response to historic inflation has caused turmoil that has many fearful of what the future holds. This is true in many areas with multifamily real estate being no exception. However, when you consider the fundamentals of real estate and also the root causes behind the current economic situation, we believe that there isn't precedence for a crash like what was seen in 2008. Although prices have and will lower some (particularly in markets that are not as strong), we believe that the following economic indicators demonstrate that the asset class will hold strong as a whole.
Difference between average rent and average mortgage
The current gap between the average cost of rent and the average mortgage has never been higher. Escalating home mortgage prices have forced many individuals to continue renting for the foreseeable future. This combined with the already high demand and lack of supply for renting apartments means that the business will likely continue to do well through this recession.
Inflation help multifamily investors
When one measures inflation housing is typically one of the large items factored into the calculation. Rent growth has been at historical highs for the past few years which has not only helped to combat rising expenses, but has actually created one of the best eras in history for investing. While rent growth will certainly go down as inflation is tempered, it's important to recognize that this link between rising costs in rent growth is one of the fundamental reasons we like investing in assets like multifamily.
What about turmoil with properties that have floating rate debt?
One thing that many individuals point to is the properties that are currently in financial distressed due to floating rate debt. Operators took on these properties with no expectation that rates would climb as high and as quickly as what they have (before they never have before). We are already seeing some deals that are selling at a discount due to this situation but the reason they are selling at this reduced amount is due to terms on current loan products available and not due to investor demand. It's also important to note that in most of these situations the property is in distress due to poor asset management which precludes the possibility of refinancing into another debt product that is more forgiving. Therefore, we do believe that there will be some solid buying opportunities due to this circumstance but not enough to warrant a crash as some have predicted.
What about single family?
Although this blog is oriented around multifamily investing, we should pause to consider single family for a moment whose prices have climbed astronomically high over the past two years which when combined with interest rates have made home ownership truly unaffordable for many. What's interesting though is that in strong markets like DFW we have seen only small price reduction in single family homes as there is still a demand from buyers who are able to purchase them and then hold until they can eventually refinance. However, some of the fundamentals of the single family market are different than multifamily and we believe single family is more likely to experience problems than multifamily due to the reasons provided above. However (unlike the single family crash in 2008) we are not dealing with a high number of overleveraged mortgages, but instead have a large number of homeowners who refinanced over the past few years into historically low rates that will likely shelter them from the economic challenges we see now.
In Summary
There are many things at play in the current economic environment but we believe an honest assessment of the situation will allow one to conclude a few things:
-Operators with safe debt who operate their properties well are doing and will do just fine if not outstanding.
-While there won't be a crash, there could be some buying opportunities in the market this year. It will still be challenging for buyers since these opportunities are limited and there is a strong demand for them from multifamily investors.
-Investing is a long term game so what's important is to pivot strategies as the market changes but continue investing with a long term perspective.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."
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