Scott Cote

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DENVER—Like many in the commercial real estate industry, Scott Cote, executive vice president and co-head of Real Assets at Aegon Real Assets US is fairly confident that a recession, or at least a downturn, is coming—the only question is when. It could be anywhere in the next 19 to 24 months, or perhaps sooner as geopolitical risk creates more downside.

In response, the company evaluated its private strategies and landed on multifamily—workforce housing in particular—as resilient to a downside scenario in the economy, Cote told the audience at the recent 23rd Annual Transwestern Real Estate Forum Institutional Insurance Investors Symposium.

Workforce housing, of course, has been attracting its fair share of investment in recent years for various reasons: demand for the product type is strong as the affordable housing crisis worsens, buying opportunities are greater and strong financial support can be had from the GSEs. Perhaps the most significant reason is that workforce housing assets, especially those in secondary markets, are outperforming more traditional multifamily product. By contrast, liquidity for institutional-quality assets in urban markets is lower, JLL noted in a recent report. And indeed, Aegon's Cote noted that the company is staying away from new construction luxury because that property market is weaker right now and doesn't have the demand drivers seen in the middle market.

How Aegon is Approaching the Market

Instead, the company is partnering with local developers, usually though a JV equity structure, Cote said at the event.

All told, Aegon Real Assets US has picked 17 markets located in the "smile of the US," he said. "New York's a great market, but rent controls ruin it for investment and multifamily. But even down in Florida and in the Central US there is Denver, Salt Lake, Phoenix—we see a lot of opportunities there."

"We've had this strategy in place for about a year and a half now. And the good news is we've levered and we've delivered really solid results," he concluded.

Strong Fundamentals

It remains to be seen if workforce proves to be a defensive play during the next recession of course, but current fundamentals suggest that it will be able to withstand economic headwinds.

A record-high 182,000 units were absorbed in the second quarter, pushing the 2019 absorption total to roughly 200,000 and putting the apartment market in position to finish the year strongly, according to stats from Marcus & Millichap, which predicted that this exceptional leasing activity will keep the national vacancy rate hovering in the low- to mid-4% range.

Class C units will continue to experience the tightest conditions, Marcus & Millichap also noted—with vacancy in the mid-3% band—as low unemployment enables those with fewer skills and less education to find work and create new households.

Broader demand trends also continue to squeeze the Class B market tighter, pushing vacancy down 70 basis points to 4.1% since last June, the report continued, while Class A vacancy dropped 60 basis points to 4.7% during the same span.