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Will there be a recession anytime soon? Many economists say yes, and many investors assume that there will be a recession in the coming year. In fact, an August survey of 226 top economists showed that 38% believed it would hit sometime in 2020, and 34% felt it would happen in 2021. While nobody can accurately predict exactly when it will begin, it’s definitely on the horizon.
Zillow is another noted source that is predicting a coming recession, based on a survey the company conducted of over 100 of the top real estate experts in the country. Also, the ongoing trade war with China stands to continue threatening our robust economy.
The Demand For Multifamily Is Growing
I buy multifamily properties across the U.S, and despite fears of a coming recession, I see that the demand for multifamily properties continues to grow. There are several factors that are driving the multifamily property growth, and I don’t see them changing any time in the near future.
One factor is the shift in our country’s culture thanks to the millennials. According to an analysis of the 2016 U.S. Census data, there are currently 71 million millennials in the U.S., and they’re the ones driving the cultural shift. It used to be that owning a home was the American dream, but many millennials have abandoned this goal as they can’t or no longer want to own a single-family home.
First, as a generation, millennials hold an enormous amount of student loan debt. One source puts the average balance of those between the ages of 23 and 38 at $34,504. That amount puts a crimp in their ability to either obtain or maintain a mortgage, despite the fact that interest rates are at a record low.
The other issue is home prices. Many millennials simply can’t afford to purchase a home in the area where well-paying jobs are located. Simply stated, they like to live in high-cost cities where owning a home is next to impossible. But this bodes well for multifamily properties, because millennials are renting in record numbers.
Lastly, millennials typically like to keep their options open and have the ability to transition to a new job in a different state, and buying a house may ground them and limit their career progression to a single location.
Another factor is retirees. Many baby boomers who have reached retirement are now selling their homes, banking their equity and renting apartments rather than buying a new, smaller home. The “downsizing craze” is happening for seniors, but the downsizing is headed to multifamily properties.
Rent Is Still Growing, But At A Slower Pace
I still see positive rent growth in the markets that I invest in, which include Texas, Florida and Georgia, but the growth is slightly slowing down. I see markets with an impressive 5% rent growth that have experienced 6% or even 7% rent growth a year earlier. Hence, I’ve had to make adjustments in terms of analyzing deals that I invest in.
Use expert reports on submarket rent growth projections and use a lower number than the one that is projected. For example, if expert projections predict a 5% growth on average for the next five years, use a 2.5%–3% figure in your analysis. That way, if rent growth slows, you are already financially prepared for it.
Construction Activity Is Slowing Down
Currently, I am seeing new construction activity and development slowing down. It stands to reason, as developers are anticipating that a recession is not that far off. It doesn’t make much sense for a developer to start building a multifamily property and then get hit with a recession before construction is even finished.
There is another reason that multifamily construction activity is slowing: The labor pool for construction trades is limited, thanks in part to an economic growth spurt that continues to add new workers each month. There simply aren’t enough tradespeople around to hire.
With fewer new properties coming into the pipeline, I believe that rents will remain stable over the next several years. In addition, I suggest buying in areas with little new multifamily construction so your properties won’t have much competition.
Summary
After a remarkable 10-year economic growth spurt, experts are telling us a recession is coming, either in 2020 or 2021. The multifamily market is still in growing demand. That’s mostly due to millennials and retiring baby boomers who are fueling the demand. While rent growth is slowing, vacancy levels are remaining stable. In addition, construction activity is slowing down in anticipation of the coming recession, which means that there will be less competition in most markets, which should help rents remain stable.