In the early 90’s there was a TV Show called “Tales From The Crypt” maybe you have heard of it? The premise of this show was a crypt keeper who was a living corpse. In each episode he would act as host leading viewers into a creepy and scary tale.
If you have been watching the news on commercial real estate recently it may feel like you were watching a new episode of Tales From The Crypt. There’s been major foreclosures of 3000+ unit portfolios and syndicators announcing capital calls. The difference is that in this episode the living corpse is multifamily investing.
With all this talk about the pending doom in commercial real estate investing, is commercial multifamily investing dead?
Tailwinds, Headwinds and Turbulence Ahead
It is no doubt that multifamily investing, like all other investment asset classes, had an amazing return in 2020-2022 while interest rates were artificially low. It seemed like there was no way to lose. Once interest rates started to rise however many investors found themselves in tricky situations.
Real estate investors were no longer able to purchase investments they once thought made sense, they were not able to complete refinances or sales with the returns they originally expected. Investors had to put cash in their deals instead of being able to take cash out. In a report released by Gray Capital there are expected to be $4Billion of multifamily debt maturities in October 2023 alone. With the speed of interest rate increases it was as if the rug was pulled right from underneath the feet of real estate investors. Those who were in especially bad circumstances started to bleed money or had to do capital calls. Add on to the news of falling rent growth and the future does not look good for multifamily.
Investors do not like uncertainty and unfortunately there is no short supply of uncertainty in the market right now. One thing that is clear is that there is still some runway to go before investors have clarity on what will happen in the market. It is likely that you will see a lot more negative news in the near term as the impact of interest rate hikes make their way through the economy.
The Future Is Unpredictable
Famed investor Jeremy Siegel has noted that we are currently in a “Goldilocks Economy.” Things seem to be not too bad but also not to great. The problem with being in that space is that there may be unknown black swans lurking in the economy. One bad move, or miscalculation could send the economy hurling towards the wrong direction.
There is no investor that knows for certain what will happen in the future however to make an investment requires that you take an inherent stance on what you think will happen in the future. No one will invest in something if they expect that it will decrease in value provide them a negative return.
Timing the market is not a game that many win. Real estate investors will have to take queues from history and continue to monitor current market trends so they do not get caught off guard.
The Fundamentals Still Look Good
Despite all the negative talk however, the reasons why multifamily is a good investment continue to hold true. Housing remains essential. Everyone needs a place to live, and the population continues to grow and outpace multifamily developments (even when multifamily deliveries are at recent highs). This is only one of the many reasons to invest in multifamily.
Real Estate investing is local. So, while we can talk about real estate in general, what happens in one specific market could be highly different than another. For example, there could be a lot of pain in the west coast while areas in the south flourish. It is important, in any time period during an economic cycle, that you pay attention to the macro and microenvironment of the market where you invest.
Multifamily As A Recession Resistant Investment
If we leave the Goldilocks economy and enter into a recession, then based on history the best place to be is invested in multifamily. Multifamily real estate is a recession resistant investment. You need to have a long-term view when investing in multifamily real estate. Based on all the fundamentals noted before and good operators that prioritize capital preservation, investing in a multifamily syndication can allow you to outlast any coming recession.