A Recession Is Multifamily Investors’ Top 2020 Concern

A recession is among the biggest concerns for apartment investors in 2020, but recent interest rates cuts could have stopped a recession from hitting in 2020. However, there are still expectations that the economy could slow next year, and investors are preparing to hedge against increased risk.

“It is difficult to say when a next recession might occur but borrowing from CBRE’s latest 2020 outlook, US GDP growth is expected to slow notably this coming year as various issues create higher levels of uncertainty, such as trade conflicts, slowing global economic growth and the upcoming elections,” Dan Blackwell, SVP at CBRE, tells GlobeSt.com. “But with the exception of any unforeseen developments, CBRE believes a recession can be avoided thanks to the positive effects of the Fed’s rate cuts in 2019. So, our firm foresees slow growth to continue into 2020, which will support already strong property fundamentals. Having said that, the market will cycle at some point and investors should always make sure they are not overleveraged and have plenty of cash available.”

While investors are moving ahead with caution, most still see strong opportunities and a long runway for apartment product. To prepare for potential risk, investors are weighing options and trading when possible. “In many ways we have never been here before, given the length of this cycle, so naturally, this will create some uncertainty among investors,” says Blackwell. “Hence, we have seen more owners this year weighing their options with holding, selling, refinancing or completing a 1031-exchange. Some of these exchange scenarios are to acquire another property here in California and some are looking to exchange out of state. We have also seen investors acquiring property with new financing or refinancing an existing one while rates are still at all-time lows.”

A recession and slowing economy aren’t the only concerns of investors. Rent control has also quickly become a top concern, particularly in markets that have recently passed new rent control legislation, like California. “I would say rent control has had the biggest impact on sales volume,” says Blackwell. “When there is a big change in the market, investors overall take time to digest and markets in general don’t react very quickly. Plus we were coming off some very big sales volume years. We went from going 100 MPH to 85 MPH so, although at a slower pace, we are still moving.”

However, once again, low interest rates could help to mitigate some of this risk. “We expect rates will likely remain low next year, which will help offset some of the rent control challenges,” says Blackwell.

Blackwell is bullish on the market in 2020, but with more risk factors, also says that working and strategizing with experienced professionals will become more important in the next year. “During times of change, investors will rely more on real estate professionals for insight and suggestions,” says Blackwell. “There has never been a better time to be a multifamily advisor in my opinion. Some investors might be cashing out and taking chips off the table. There will be investors looking to improve their holdings and 1031-exchange into better-located assets or more units where there is value to be added. And there will be new buyers coming into the market that will want to put capital to work in Southern California. All of these reasons are why I am excited about 2020 and know it will be a great year for the market. From my vantage point, I expect sales activity will likely be on par with 2019. Next year will be all about navigating rent control when purchasing properties and how to operate and renovate them under the new terms of the bill.”