Despite solid job numbers in the first quarter, economists upgraded the likelihood of a recession in 2023 to 64%. Recent bank failures and the move by the Federal Reserve to continue increasing interest rates somewhat explain why projections rose from 58% in February. Only 18% of economists put recession odds below 50%, and 47% project the odds at 70% or higher. Although the consensus among economists is that a recession will begin later in 2023, a delay from earlier projections.
While a recession negatively impacts most parts of the economy, it can also create opportunities for real estate investors prepared to take advantage of changing market conditions.
How Countercyclical Assets Can Grow Your Portfolio
Investing in countercyclical assets, such as multifamily, can provide a unique opportunity to generate returns even in a challenging economic environment. Much like a seesaw, countercyclical assets move in opposite directions depending on the weight distribution on either side. Housing availability, population migration, employment opportunities, and broader economic trends determine housing demand and regional pricing.
A slowing economy typically leads to falling stock prices. However, housing, especially rental units, often remains profitable because rent payments tend to be the first bill paid.
A recession can make it harder to obtain financing, especially with the recent bank failures. Stricter lending requirements also lead to more potential buyers choosing to rent, increasing demand for apartments. Higher demand puts upward pressure on rental rates and increases occupancy, especially during a time of housing shortages.
The current economic climate has been marked by stubborn levels of inflation, leading the Federal Reserve to raise rates at an unprecedented pace. Now banks are implementing stricter financing requirements due to recent bank failures. Add ongoing housing shortages, and many potential home buyers find it necessary to continue renting, creating stability in most regional markets for multifamily assets.
When managed effectively, real estate can provide steady and predictable cash flow. It increases diversification and can offset stock market volatility.
Multifamily real estate diversifies your portfolio but is not without risk. Property values could fall temporarily, and occupancy and delinquency rates could rise in less desirable areas or regions hit hard by unemployment.
Yet, compared to other assets, multifamily is generally considered to be more resilient during economic downturns and less volatile than the stock market. Adding a countercyclical asset such as multifamily to your portfolio can provide an opportunity to capitalize on steady returns even during economic downturns.
The sponsor or manager and the terms negotiated at the time of purchase often determine profitability. Managers who understand how to mitigate the changing market conditions during a recession can reduce overall project risk and lead to ongoing profits despite the challenging economic times.
At McKee Capital Group, we have experience managing multifamily properties in various economic climates and understand how to mitigate investor risk. To learn more about real estate syndications and how we choose and manage properties, watch our introductory video.