The Impact of a Recession on Multifamily

Despite worries about a recession, analysts believe that slower building will likely maintain a balance between supply and demand for multifamily housing for some time.

Three Moody’s economists argue in a recent analysis that “housing substitutability” can shift demand to the sector, so even if multifamily demand cools, restricted multifamily building will help preserve the sector. As the average property is currently approximately 44% more expensive than in 2019, would-be buyers of single-family houses are choosing to rent rather than buy, which in turn is boosting demand for multifamily units. The increase in short-term rates and their effects on mortgage rates are further exacerbating it, and Moody’s observes that there are already indications of markets cooling in several of the areas where prices rose most swiftly during the pandemic.

The Moody’s report states: “Although this may not lead to a widespread slashing of housing prices everywhere, housing price declines are a real possibility in the next few quarters or years depending on how severe and how long the next recession will be if there is one. Multifamily rents, on the other hand, are generally slower to respond to rising interest rates and remain more stable. If the substitutability within housing matches the Great Recession’s strength, then multifamily rents may remain elevated for some time until single-family housing stabilizes. Based on the past few recessions, the effect on multifamily performance may not begin until near or after a recession ends.”

The demand for multifamily housing is also likely to be sustained by low unemployment and a competitive labor market, which was not the case in prior recessions (as in the 1980s, when unemployment topped 9 percent ). However, while household balance sheets are usually doing better than they did during prior downturns, personal incomes with disposable cash are declining.

“As the multifamily and single-family home affordability crisis intensifies across more and more metros nationwide, this diminishing financial safety net is troubling, even for multifamily,” Moody’s notes. “Job losses or affordability issues could force some renters to find roommates or put off that move to single living.”

Strengthened financial regulations “may be a godsend” for multifamily, according to Moody’s analysts.

“Even if the Federal Reserve fails to engineer a soft landing this year or next, these rules will likely prevent the real estate market from sliding into a deep and long recession or suffering large aftershocks,” the trio wrote. “While many single-family markets will likely see small to moderate prices decline in this situation, multifamily’s positive performance should hold up relatively longer, as in previous downturns. Overall, in a mild recessionary environment, we would expect only a moderate vacancy rate increase and rent growth to simply decelerate. A slight and short-lived dip into negative territory towards the end of the recession is possible, but a free fall is highly unlikely.”

The SVN Vanguard team can help with your multifamily real estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale-leaseback? Contact us.