No investment can guarantee complete certainty in this unpredictable economic environment. However, apartment buildings stand out as some of the safest investment options when looking for safer alternatives. With talks of an impending recession and prolonged market downturns, coupled with soaring interest rates to combat the highest inflation rates since the early 1980s, the financial climate is undeniably challenging.
Given these circumstances, it’s natural to feel uneasy about the future. However, there’s good news for those adequately prepared and actively engaged in the multifamily sector. Despite the prevailing economic challenges, multifamily properties offer a sense of stability and optimism.
There are multiple reasons to consider investing in multifamily properties. Each reason will be explained individually, as some may not apply to your personal portfolio, though, most of them are likely to be relevant to your situation.
Multifamily Inflation Hedge
Investing in multifamily properties offers a significant advantage as an inflation hedge, which is a widely discussed and valid topic in the commercial real estate industry. With the ability to adjust rents in response to rising prices, multifamily investments provide a sense of security amidst inflationary pressures.
In comparison to other types of commercial real estate properties, such as office and industrial spaces, multifamily properties shine in terms of their flexibility. Office and industrial properties often come with long lease terms, often spanning from 5 to 10 years, where annual rate increases are predetermined far in advance. This lack of flexibility becomes challenging in predicting and adapting to inflationary environments, especially as we experience one currently.
Lease renewals for multifamily properties, on the other hand, often occur on an annual basis, giving investors adequate opportunity to respond to changes in costs and market dynamics by modifying rental rates accordingly. Considering investing in multifamily properties presents multiple compelling reasons, each with its individual merits, tailored to suit various personal portfolios. While some reasons may not apply to everyone, most of them are likely to be relevant and advantageous in your specific situation.
Housing Demand Remains Strong, Despite Recession
The demand for housing remains high even during economic downturns, which is a well-known fact. According to the National Multifamily Housing Council and the National Apartment Association, the nation will require 4.3 million units by 2035 to accommodate the nation’s rising housing demand. Even during a downturn in the economy, this demand will continue.
Given this situation, purchasing home inventory is a smart business move because housing needs will never go away. There might be some exceptions to this rule, though. You might have difficulties if you own upscale, luxurious flats in a market where the rentals cannot be supported during a recession. Owners of regular market-rate multifamily complexes, workforce housing, and designated affordable housing should pay closer attention to this point.
The Rise of Renting and its Growing Trend
Renting has become increasingly popular, especially among those under 35, despite a large number of households owning their homes. Renting is not just for young people who cannot afford to buy their own property, as many individuals are choosing to rent. During times of economic hardship, this trend is likely to continue. It is important to remember that high-interest rates affect not only multifamily investors but also buyers trying to get into their first home.
What’s Next for NDD?
We at Nine Doors Down are still active in the market and are witnessing distressed properties being sold at a 20–30% discount despite the economic unpredictability and increasing interest rates. As demonstrated by historical precedent, we seek out investment opportunities that fall within our buy box and pair them with long-term debt in order to eventually refinance at a reduced interest rate. Once we refinance, the cash flow for our investors jumps significantly.
Warren Buffet once said, “Be fearful when others are greedy, and be greedy when others are fearful.”
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