Recession? What Multifamily Real Estate Investors Should Expect Now.

Now that the yield curve has inverted, the “R” word has been all over the news. Despite all the talk of a slowing economy and a possible recession the economic fundamentals for multifamily real estate to remain strong:

• Unemployment remains at record lows
• Rent growth remains strong and supply of multifamily is limited
• Interest rates are set to remain low for a long time
• Most multifamily deals have positive cash flow day one

A slow-down or even a recession will not change all this[1]. At OpenPath we remain confident in our proven model: focus on quality properties in growing metros and specific sub-markets where demand for workforce housing is outstripping supply, avoid overpaying on the purchase, and then post-acquisition add-value via light renovations, better management, and our Urban Village community building initiatives.

Yet, as sponsors/buyers of new opportunities, we must remain disciplined. Ten plus years of a growing economy and a corresponding rise in national rents have produced strong returns for multifamily investors. Over the same period interest rates and bond yields have remained near historical lows making multifamily returns particularly attractive to investors looking for low-risk income producing investments.

As a result of these two factors, demand for multifamily investment continues to surge from investors of all sizes — from institutional investors like endowments and pension funds to individual investors like you and me — and seemingly everyone in between. In recent years we have seen a steady increase in the willingness of many of these investors to overpay for multifamily properties. These buyers appear to be overly optimistic about future rent increases or they are paying too much for lower quality properties (i.e. weaker metros and/or properties with physical issues — think bad plumbing.)

At OpenPath we have strongly avoided these riskier propositions. Be assured, we will continue to do so. In a more competitive environment we have been exercising strict discipline in our acquisition efforts (we walk away from deals when the bidding gets too high). At the same time we are placing extra scrutiny on the quality of the properties we pursue, working harder to find off-market properties where we can avoid heavy competition, and working smarter to create opportunities that we can win on factors other than price — like our strong reputation and certainty of close[2]. We are pursuing several promising opportunities as I write this and hope to have something to share with you soon.

All this said, at OpenPath we prefer to be conservative in our deal modeling and projections. We believe it is always better to avoid over-optimism, to under-promise and over-deliver. So going forward we may share opportunities that we have modeled to slightly lower projected IRRs (i.e ~12–14%) and annual returns (~5–6%). We will not sacrifice quality. We remain confident that OpenPath returns will provide stronger risk-adjusted return than bonds and stocks. Bond yields and interest rates are expected by almost all accounts to remain low for a longtime (the yield on the 10Y US Treasury is well under 2%). The outlook for stocks is even more concerning as an economic downturn will bring considerable risk to share prices. (The post I wrote about this last year still holds true.) Further we believe investors will continue to appreciate the tax advantages and greater income that real estate offers versus stocks and bonds. Lastly we are confident that OpenPath’s experience, expertise and disciplined approach to commercial multifamily real estate will enable us to produce stronger returns with less risk than our peers.

If you have questions on any of this, please feel free to reach out to me at anytime. David at OpenPathInvestments dot com.

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75”

“Where Should You Go When Stocks Start to Fall”

“What’s the Deal with that Inverted Yield Curve? A Sports Analogy Can Help” — NYT

Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.