1031 Exchange: Take the DST or TIC Route for Multifamily in a Post-Covid World?

While the housing market appears to be faring well against the current recession, multifamily real estate in particular traditionally performs best under economic distress. In other words, the expectations for the post-pandemic housing market are compelling, and this is especially true for multifamily real estate since it is often regarded as “the most resilient property sector to recessions.” For example, during the 2001 recession, US multifamily property rents fell by 6.7%, whereas office rents fell by 7.4% and industrial rents fell by 17%. Furthermore, post-recession, US multifamily property rents grew at considerably higher rates than the rents of office properties and the rents of industrial properties. The multifamily housing market exhibited similar behavior in 2008. During the 2008 recession, US multifamily property rents fell by 7.9%, whereas office rents fell by 17.7%, industrial rents fell by 17.5% and retail rents fell by 14.1%. After the 2008 recession, multifamily rents exhibited a lower level of rent decline and a higher level of post-recession growth than office rents, industrial rents and retail rents. Therefore, “for multifamily owners and investors, the prospect of a coming recession should offer pause, but not undue concern. Rent loss is likely, but expected for a limited period of time followed by a strong rebound.”

Growing uncertainty regarding the long term impact of the Coronavirus has reduced current consumer spending and has delayed current consumption. As such, Americans are reluctant to place down payments on homes thereby committing to future debt obligations. Since the start of the pandemic, Americans have stopped looking for permanent housing as revealed by the sudden and rapid drop in the number of privately owned housing demand. The fact that multifamily rentals provide a short-term alternative to home ownership via temporary housing further illustrates its ability to withstand harsh economic conditions. Not only does renting require less commitment than ownership since tenants are not contractually tied to more substantial future payments, security deposits are more affordable and more feasible than down payments. Furthermore, renting provides more flexibility and accommodations in regards to location choice. Finally, as the remote work trend continues beyond COVID-19, commute times and location will play a less important role in the home search for some buyers.”