Welcome to the Horizon Multifamily round table discussion, we have Dr. George Roberts, Tom Kirkpatrick, Steve Tappe and myself, Dr. Pavlo Prokop joining us. Today’s discussion is “Multifamily real estate, is it actually recession resistant?” Today’s discussion will provide the first topic of this series, 1 of 3 articles on this topic of Multifamily Investing.
Dr. Pavlo Prokop: We can kick it off by talking about a couple of data points of the last two recessions by using data published by CBRE.
One data point is the recession of 2008-2009, Multifamily experienced negative rent growth for only five quarters, with cumulative rent decline during that period of 7.9%.
– Rents in Industrial declined 17.5% with negative growth continuing for 13 months
– Rents in Office declined 17.7% with negative growth continuing for 9 months
– Rents in Retail declined 14.1% with negative growth continuing for 21 months
Most properties in decent locations remained cash flow positive during the last recession which resulted in very low default rates on Multifamily loans.
It looks like Multifamily was the best asset in the commercial space, during the 2008-2009 period. The other data point discussed will be the COVID recession.
Steve Tappe: Well, I owned and managed a lot of Multifamily during the 2008-2009 and we had a slight dip in the beginning when basically people were going to lose their jobs, lost their jobs, there was a move out not as bad as the year 2000, and then we released everything within. I’m going to say in four or five months we were full again at a slightly lower point in the market I was in. It really wasn’t painless but it was a minor inconvenience.
Dr. George Roberts: Steve do you want to contrast that with your other asset classes?
Steve Tappe: Well in 2008, that was the asset class I owned, the same asset class, I have three other markets now, same asset class different markets.
They reacted very differently in 2020, so I can tell you that the three markets would be San Francisco (in the city), then a couple of different sub markets – one asset in Denver and one asset in Grand Junction Colorado.
San Francisco, the sub market that’s basically the midtown corridor was devastated and it’s still devastated with twenty percent vacancies, a twenty percent lease, thirty percent drop in rents from the top of the current market and the current market asking rents are not moving.
I haven’t rented a unit in weeks and given the San Francisco rent control laws you can’t really drop. A lot of owners are, I don’t want to say banking units but they can’t rent them too low because all the other tenants will come back and re-trade their rents to the lower position and in San Francisco there is no way to temporarily lower rents. If you respond with lower rents, you lower forever.
In Denver (Capitol Hill area) which is a nice neighborhood, nothing. As if it didn’t happen, normal.
Rents stopped going up basically. There was barely an inconvenience. That’s more of a Class A property.
I have a class C property in Grand Junction, near the university up there. It’s student and workforce housing. That one reacted and did have an issue where we had a plan to raise the rents about $100 – 150 dollars. And that got put on hold because people did lose jobs, people did move out. The building had twenty percent vacancy for about two three months and then we filled up again but at the old rents.
And currently now, we’re able to move ahead with the planned increase in rents and all the rents in the last six months have been raised to the $100 – 150 dollars. The new rents the last six months have been on that $100 – $150 dollars rise of what we anticipated and it’s full now.
The two Colorado markets (the result was) either nothing or a minor inconvenience.
In San Francisco, the midtown corridor, its just devastation. The other property in the marina, which is more affluent sub market, and that one had minor inconvenience. The rents dropped about 15% and everybody there said OK this is now lower rents, so we had to lower the rents to everybody. We dropped down to the $4000’s for rent to the $3000’s on one of those properties. One unit is currently vacant and the call volume is very slow. San Francisco if you read about it being a terrible market, it is a terrible market right now. And downtown San Francisco, I drove through it last time I was out there and its empty. If it fills up again, I think we will see some traction.
Tom Kirkpatrick: Well, shifting over to the Southeast, which is the area that we are really focused on. Mostly speaking from here in eastern Tennessee, it has really been a blip. I have maintained pretty much full occupancy throughout. Not a huge complex but we had good tenants in there and screened properly. We did not push rent raises during 2020. I am trying to think if we had a nominal rent raise maybe $5 or something like that with any apartments that turned but we had very few apartments that turned. Most people stayed, there wasn’t a lot of movement going on with all that was going on with the economy. I had everyone from fast food workers to an HR Director. Even my fast food workers were still working for drive thru service. So we were very fortunate and in this particular market, it was just barely a blip on the screen. And right now I am renovating a few units and we are going to come back with rents higher that I have gotten than any units comparable prior. So minor flat spot and pretty good prognosis going forward.
Dr. Pavlo Prokop: So each recession is different because George Roberts, Mark Prokop and I have bought an asset during the COVID recession. It just shows that each recession is different. Rents are going back up in the Orlando area, estimates are 8% right now for this year (2021). That is the last statistic I saw.
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