Multifamily Real Estate Advisors in San Diego
Article written by Jason Lee
The novel coronavirus, also known as COVID-19, has already changed the daily lives of people around the world. Social distancing and self-quarantining are being encouraged to help flatten the curve so the healthcare system can handle the needs of patients in any given area. Yet, even as your local city gets a handle on the pandemic itself, there will still be lasting impacts from COVID-19 unrelated to healthcare.
The economy has been hit as hard by the virus. Much of the economic impact is still developing, which prompts an air of uncertainty surrounding investments and financial decisions. With that, there are some factors that you should be aware of as you continue to navigate these circumstances from a consumer and investor’s perspective.
If you were contemplating investing in real estate prior to COVID-19’s arrival, keep reading! You may be tempted to put away your checkbook and avoid investing during the next several months, but there’s a lot to know about where to put your cash when the market is crashing. Here is why apartments are a safe haven during recessions — even ones spurred by epidemics.
How is the economy impacted by COVID-19?
Depending on your field, you may have already experienced some of the economic impacts of COVID-19 in the past few weeks. In this type of situation, the economy primarily suffers on the demand side.
This is due to the fact that the best way to adjust for healthcare needs is to have everyone stay home and social distance to prevent the entire community from catching the coronavirus at one time.
Ultimately, the majority of the population staying home and remaining healthy enables hospitals and other healthcare facilities to care for those in need without becoming overwhelmed.
However, when everyone stays home from school and work, this also causes a domino effect in the community. For states on full lockdown or shelter in place, the only spots that are guaranteed to be open are supermarkets and pharmacies.
While other essential businesses are up and running, they aren’t accessible to consumers like they would have been before the pandemic. In fact, businesses that you may be used to interacting with on a daily basis are closed.
Restaurants, bars, and small businesses have shut down and have laid off workers in the process. Likewise, workers in the travel, tourism, and hospitality industries are being furloughed because no one is traveling or utilizing their services.
Therefore, the economic impact is directly hitting workers, many of whom are hourly and don’t necessarily get paid if they miss work. While hordes of Americans are working from home, there’s a whole other group of people who don’t have that luxury.
Their jobs no longer exist with everyone following pandemic protocol. What keeps America healthy won’t keep food on their table, and as a result, they’re no longer pumping money into the economy. They can’t spend because they no longer have a paycheck to do so.
So, with the economic outlook looking grim, what does that mean for you as an investor? Is it even smart to make investments during this time? How can you do so wisely?
Real estate as an investment during recessions
When you consider real estate as an investment during a recession, you may pause. Didn’t the “Great Recession” in 2008 greatly correlate with the housing market? Is this really the smartest and safest place to put your money? There are a couple of ways that 2008 differs from today. Let’s start with a brief recap of what happened in the past.
In the early 2000s, there was a brief recession because of the dotcom bubble. Following that, a number of subprime mortgages with manageable rates were loaned out to individuals with struggling credit.
This increase can be attributed to the Federal Reserve’s decision to lower the federal funds reserve rate as a way to spur growth.
For individuals who previously struggled to obtain loans due to poor credit, it was great. The rate of American home ownership was rising rapidly. Yet, along with the rising rate of home ownership was an increase in some other dangerous factors such as housing prices and more subprime mortgages.
The Federal Reserve’s reaction to this was to raise the interest rate over a dozen times to avoid inflation and to slow down a “housing bubble.”
A housing bubble occurs when when there is high demand, speculation, levels of investment, and excess liquidity — all of which cause home prices to increase and all of which are unsustainable. These factors resulted in the bubble bursting and the housing market crashing.
Now, the cause of the housing market crash for the 2008 recession was due to a lending crisis. This is one key difference. The housing market crash drastically impacted the economy.
However, any impact that real estate sees in 2020 and beyond can be directed back to something other than a lending crisis. This time, it can be attributed to a medical cause, the COVID-19 pandemic. This is entirely unrelated to lending and thus comes with its own consequences.
Overall, when evaluating how the real estate sector does during recessions, it’s important to compare apples to apples. Seeking more similar cases where the causes and factors involved are the same will yield more similar results.
Don’t strictly rely on information from the 2008 recession to provide guidance when the circumstances are entirely different.
Why is an apartment a solid investment to make?
So, you know real estate in general is a worthwhile investment during a recession if done correctly, but is an apartment the way to go?
What about a single-family home or office building?
Would all of these options give you the opportunity to buy low, sell high, and reap the benefits?
The simple answer is no.
Not all classes of real estate do well during a recession for a lot of the same reasons that the economy is currently beginning to decline.
Right now, commercial real estate is the primary sector that is suffering.
Retail businesses, offices, and hotels are all doing poorly due to the pandemic. Companies have sent workers home to work remotely.
Individuals are no longer traveling.
And the government has recommended that all non-essential businesses close as a way to control the spread. As a result, businesses will struggle to pay rents during these months when they have little to no revenue.
On the other hand, apartments are widely considered to be “recession-resistant” because people will always need a place to live.
cities like New York, San Francisco, Denver, and Seattle have gone out of their way to ensure that people will be able to stay in their homes during this period.
They’ve announced a 90-day moratorium on evictions to ensure that tenants are able to stay in their homes, and landlords are working to be especially flexible.
To be honest, this is good for tenants, but not for owners.
This will hurt current landlords who cannot evict a tenant who is not paying rent due to this current crisis.
But, on the bright side I have talked to many different owners in San Diego, and they have given me feedback that most of their tenants will be paying rent next month.
Also, a way around this eviction moratorium is to incorporate an addendum into your tenants’ leases to pay you back for the lost rent due to circumstances out of their control.
The economy will bounce back, so it is only a matter of time you can collect your rents if you miss a month or two.
Finally, middle-tier and lower-end apartments generally tend to have more consistent occupancy rates during difficult economic times, and the uncertainty of COVID-19 could steer buyers toward apartments rather than larger homes or condominiums.
There aren’t too many potential tenants looking for a class A $5,000/Mo high rise building in downtown in times like these…
Why real estate investors have the upper hand
During a recession, real estate investors often have an advantage over any buyer who requires lender approval. This is a huge pro for current investors and a massive con for any new buyer hoping to purchase an apartment building.
In general, homeowners will be looking to execute any transaction (with a good offer) as fast as possible. If you’re putting down an offer against someone who isn’t an investor, your cash offer will be hard to resist, especially in a recession.
In conclusion, Apartments are a “recession-resistant” investment during hard economic times because everyone needs a place to live.
If you were looking to purchase real estate prior to the coronavirus outbreak, don’t let the declining markets discourage you. As long as you aren’t over leveraging on your properties —i.e. looking to invest for high profits by using borrowed money — then you should be fine.
There are good opportunities in every market.
The one factor to be aware of is that rentals can be “capital intensive,” which means they require funds to maintain. You may need to do repairs, maintenance, and upgrades. You’ll need cash for taxes, insurance, transaction costs, etc. This is all worth keeping in mind during a recession since money can get tight for anyone.
If you were seeking to invest before the coronavirus ever hit, apartments could be your best recession hedging bet.