CPI Blog

How to invest in multi-family and BTR-SFR in the recession phase of the cycle

by | Nov 4, 2022

Dear valued investors and future investors,

It’s time yet again for CPI Capital’s weekly news briefing. This contains a mixture of updates, commentary and informative articles about the lucrative world of passive real estate investment.

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As we’ve said many times, real estate markets move in cycles, although the cycles of various property asset classes do not necessarily move “in-sync”. For example, multi-family or BTR-SFR properties are, typically, more resilient in investment performance terms than other property assets such as retail or hotels, as their rentals and values are less prone to fluctuation.

So, this week we are going to look at why, across most of the US, this is so for multi-family and BTR-SFR properties; and how best to look for investments in the sector.

Background: the economy

The two key phrases which many in the real estate business seem to be talking about these days are “interest rates” and “recessionary times”.

There’s no doubt that general inflation is high and that the Fed has already raised interest rates over the last year, with more increases likely into at least early 2023.

There’s also no doubt that there have been two consecutive quarters of GDP decline meaning that, technically, the US economy is in a recession. Or is it? Due to the strong labour market and high employment rates, there is an argument to say that this is not the case or, at the worst, a quasi-recession

But whether it is a recession or not, the main point is that, whilst the multi-family or BTR-SFR sector is not immune to the effects of a recession, such investing offers particular advantages in dealing with uncertain economic times; after all, the bottom line is that people still need somewhere to live!

How did multi-family and BTR-SFR properties perform in past recessions?

Over the past 40-50 years, there have been five recessions, culminating in the Great Recession in 2008. During such periods, in the various market cycles apartment rents were much more resilient than rents for the other types of properties and post-recession growth far outpaced them as well.

Multi-family and BTR-SFR properties experienced the lowest level of rent decline and shortest period until rents recovered to their prior peaks.

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Multi-family and BTR-SFR properties are relatively stable in terms of occupancy and income streams

Fundamentally, economics is about supply and demand; this is what moves real estate markets, and the multi-family and BTR-SFR sectors.

In the US, on the supply side, there are still extreme housing supply issues; not enough housing to meet the demand. Many apartment buildings across the US are full and, accordingly, rents have and will continue to grow.

On the demand side, multi-family and BTR-SFR properties will continue to be underpinned by several key demand drivers, whether there is a recession or not:

  • Affordability of ownership: with mortgage rates topping 7%, nowadays many people simply can’t afford to own their own homes.
    In the 10 years from 2008 to 2018, the average home sales prices rose almost 32% across the US, according to data from the National Census. However, average household incomes rose less than 6%. In certain fast-growing areas, price rises have been even greater.
    The result: more people will have to rent.
  • Growth in retirees: by 2035 almost 35% of US households will be headed by a person over the age of 65, with many of the approximately 79 million such retirees having a strong preference for renting, usually after cashing in ownership of real estate they have accumulated over the years.
  • Millennials: need or have no choice but to rent, given their:
    • preference to live in urban areas where acquisition costs are relatively high and new home supply limited;
    • high levels of debt, often carried over from their college days, have reduced their affordability to purchase property;
    • likelihood to get married (if at all) and have children later in life, two significant events typically associated with home ownership.

So, if the evidence to invest in multi-family or BTR-SFR properties is compelling, how best to go about investing in the sector?

Clearly, as with any real estate investment, the multi-family or BTR-SFR sector is not totally immune to market stresses.

However, most passive investors will be aware of the advantages of investing in the sector and the first step is to seek projects with an experienced syndicator or sponsor who has a track record of delivery of investment returns

Such sponsor will have done their homework and due diligence on the multi-family or BTR-SFR project in question and:

  • be offering a well-selected asset in a thriving and growing location, as this will, invariably, perform much better than investments in other sectors;
  • will have rigorously underwritten the assets in question so that the expected investment returns should materialise;
  • offering a property which provides stability, balance and consistency for a passive investor’s portfolio, with the prospects of regular cash-flows and a potential uplift in capital value upon investment exit.

CPI Capital believes that, whether the US is in recession or not, multi-family and/or BTR-SFR real estate’s unique position as an investment offering the basic need for accommodation distinguishes it from other property classes. Most people will forgo many other expenses in difficult financial times before giving up their place to live.

Furthermore, property cycles are just that: cycles; and, as we at CPI Capital have said before, property market markets are not homogenous; each has its own characteristics and position in the cycle. This means that, whilst investing currently in some cities in Arizona may be a good move, investing in some cities in, say, the north east of the country may not.

In any event, our passive investors can rely on us to effectively manage our investments through all stages of the property cycle!

Yours sincerely,

August Biniaz
CSO, COO, Co-Founder CPI Capital

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