Among life’s certainties are death, taxes, losing socks in the dryer, and recessions. Since the Great Depression, there have been 14 recessions in the United States. During these prolonged downturns of economic activity, consumer behaviors tend to change: most consumers look for better deals on the essentials; they may cut down on the treats; the purchase of durable goods gets pushed back; and for the “maybe somedays”--well, someday gets farther away. Despite these common behavioral reactions to recessions, one truth remains: people need a place to live. Because of the essential nature of housing, apartments withstand the economic hits of recessions. They are recession-resistant.
Vacancy rates during U.S. recessions illustrate the need for housing and the durability of apartments as an investment. Nine of the last ten recessions saw only slight increases in vacancy rates; the most recent recession experienced a decrease in vacancy rate.
During recessionary times, some purchases can be cut; others might have to wait. But the need for housing is non-negotiable. This need will keep apartments occupied--even during tough times.
Occupancy is great, but occupancy’s effect can be canceled or neutralized if rents were to drop during recessionary periods. That has not been the case, however. Rent rates withstand economic downturns due to lease terms and diverse property classes for tenants:
Lease terms: Because rent rates are typically locked in for a year or longer, they will not experience monthly volatility. Those rates are locked; the cash flow is predictable. Since the 1980s, only two recessions have lasted longer than 11 months, allowing rent rates to stay stable and even increase, as will be shown later.
Property classes: In the event that renters do, in fact, need to get out of a lease due to an economic downturn, the fact remains: they will still need housing. Those previously renting Class A properties may seek more favorable rent in a Class B rental. Those renting in a Class B property may find affordability in a Class C property. This supply of renters may see additional expansion from homeowners looking to get out of a more costly mortgage or potential home buyers opting for renting due to the economic uncertainty. The rent rates of rental properties will hold; history suggests that renters will find their fit.
Two charts emphasize a trend of growth in rental rates. The first shows the historical progression of median monthly rent rates. For those owning or investing in rental properties, the overall trajectory of rent is a positive one. Of exceptional promise is the market trend of the past 15 years which has seen rents increase by more than 80%. Examining trend lines during recessionary periods (shaded gray on the chart), economic slowdowns have little to no effect on rent rates, supporting the view that apartments are recession-resistant.
The second chart may be more telling, showing the monthly inflation of rent rates since 1954. With the exception of a ten-month span from December, 2009 to September, 2010, rents have experienced inflation, averaging a 4.16% increase over this time period. Keep in mind, this time period contains ten recessions in the United States. Even through most recessionary periods, rent rates held or increased.
About that dip below the red line: The period from December, 2009 to September, 2010 was the only time when rent rates did not experience inflation--even then, deflation was minimal: 0.73%. This dip came on the heels of the Great Recession (December 2007--June 2009). While not ideal, apartment resilience and predictability are highlighted when compared to the S & P 500’s volatility during the Great Recession (December 2007--June 2009). The S & P 500 fell 37.56% over the course of the recession; it would take 895 trading days before the S & P recovered to its pre-recession levels and further rebounding. In short, apartment rentals tend to be a predictable, albeit rainy drive in the country through recessions; stocks during recessionary times can be more of a wild roller coaster. Let’s look at the performance of other asset classes during recessionary times.
Thus far, the case has been made that apartments--even during recessions--are a stable, predictable investment. Because housing is a MUST, tenants will seek apartments. History shows that rent rates hold, even rise, during recessionary times. To understand the unique, exceptional, and desirable stability of multifamily apartments, let’s look at how recessions affect other asset classes.
Recessions impact other commercial real estate classes differently. Retail, for instance, typically sees a drop in sales as spending patterns change. People might not need the handbag or the sweater, but they need housing. Retail often feels an immediate and direct impact during recessionary times, resulting in store closures and fewer grand openings. Likewise, offices may feel recessions’ economic impacts, being forced to downsize or shutter. The possibility of remote work or hybrid work leaves the future of office space uncertain. Unoccupied offices could be converted to apartments, given the stability and predictability of residential real estate. These transitions to residential would need to make financial sense: either purchased at a discounted sale price or with the aid of significant tax benefits or government grants.
The chart below, while not specific to recession performance, shows the resilience and profitability of apartment investing in comparison to other real estate asset types over a 20-year period--a period that includes three recessions. Beyond a one-year holding period, apartments serve as the most profitable of real estate options.
Not all recessions are equal; not all stocks behave the same way. This, however, has been a general pattern regarding stock performance during recessions: a decline in value a year prior to the recession; a continued drop during the recession; a rebound in the 12 months to two years following. Specifically, the S & P 500 dropped an average of 3% in the year prior to recessions before dropping, on average, another 1% during the recession before the post-recession rebound. The chart below shows the S & P 500 Index over the past 90 years with recessions shaded in gray. Notably, the Great Recession witnessed a catastrophic drop from a December, 2007 point of 2,146.74 to a 1,308.19 in June, 2009.
At Evergreen, we specialize in multifamily residential real estate and know its importance as part of a diversified portfolio. Multifamily apartments are proven, predictable investments that serve as an anchor against inevitable recessionary storms that will come again.
We would love to talk more about investing in multifamily properties. If you are interested in learning more about ways to make your portfolio more recession-resistant, please contact our office at (724) 900-0009 or e-mail Mark Brooks at mark@evergreen-pgh.com.
