Multifamily real estate can be a steady revenue source in volatile times. Still, not every apartment property is recession-proof. An apartment glut, local layoffs or a debt setback can turn a reliable income generator into a troubled asset.
Equity markets already are signaling an economic contraction, Bloomberg noted recently. Falling bond yields and stock prices make private real estate a smart defensive measure. Even if real estate prices fall–or if buyers and sellers move to the sidelines–multifamily property owners still can ride out the downturn with a source of passive income.
To position a portfolio for multifamily rent growth, investors must size up the local market, their property manager and their financial position. Boots on the ground will help multifamily real estate buyers identify recession-proof properties (or take steps to strengthen the fundamentals of properties they currently own) and show property managers the path to gaining competitive advantage. The seven steps below will assure a more resilient apartment portfolio.
7 Steps Safeguard a Multifamily Portfolio From a Recession
1. Dodge the Apartment Glut. This year developers will deliver 319,000 new apartment units, market analyst RealPage predicted in The Wall Street Journal. That’s the biggest build-out in nearly three decades. Last year rents rose 3 percent nationally, which suggests the multifamily real estate market is strong enough to absorb this new inventory.
Not every market will set new construction records, though. Houston’s apartment boom peaked in 2017, RealPage reported, after the oil price correction turned off the funding spigot. Now Department of Labor statistics show that Houston is a job growth leader. However, apartment deliveries continue to fall, which means landlords should enjoy sustained multifamily rent growth until new construction catches up.
2. Know Your Neighborhood. Growing cities are likely to maintain demand in a downturn, even where development remains robust. Some submarkets can present untapped opportunities. For example, Chicago’s multifamily building boom follows the elevated lines to hot neighborhoods. Suburban transit hubs, meanwhile, offer alternatives for families looking more space or school choices.
Look for acquisitions with features that can’t be replicated—these assets are as close to recession-proof as assets can get—and market their unique character. Proximity to a train station, highway, shopping or entertainment will provide an enduring advantage.
3. Know Your Tenants. The urban renter will sacrifice space and pay more for convenience. Suburban infill projects that command a premium require two or more bedrooms to attract young families, good schools, recreation opportunities and nearby retail. But every submarket is different. A strong business plan will examine local conditions to appeal to not just a target group but also a range of renters.
In your due diligence review, a property’s lease files will reveal not only the stability of a multifamily property, but also its demand drivers. If there are no families with school-age children on the roster of renters, the phenomenal school district didn’t factor in their decision to sign the contract. But it’s important to understand what did influence demand.
4. Use Leverage Responsibly. A recession-proof portfolio should be able to pay its debt service despite a shock to top-line revenue. Landlords who refinance debt repeatedly will have to put up additional equity in most cases. Property owners who borrow conservatively will be rewarded.
5. Give Health Amenities a Workout. A fitness center is a requirement for most tenants. Cardio and weight equipment are ideal, but most multifamily properties should be able to include a yoga studio or exercise room and bike storage. To stand out, consider adding on-demand video workouts. These reasonably priced virtual trainer services started as a luxury apartment amenity, then spread to hotels.
6. Respond to Varied Schedules. Start by booking a move-in hand-off where staff meets the tenant to head off any stressful issues. Inspect the apartment unit beforehand, and welcome renters with a gift basket or other sign of your hospitality. Apps can allow tenants to arrange for repairs, dog walkers, cleaning, housekeeping and other on-site services.
7. Keep Common Areas Buzzing. Wine tastings, cooking classes, group dog washing and other social events give multifamily properties a greater sense of community. Make a concerted effort to know people’s names and cultivate relationships. A responsive staff will keep residents happy, reducing unit turnover and attracting positive online reviews and word-of-mouth recommendations.
Well-run apartment buildings tend to retain their value as even cutting-edge businesses struggle to hold market share. Investors who own good, well-capitalized assets and provide services at a high level will thrive through economic ups and downs.
