Since the Fed announced its rate cut on July 31st, talks of recession have consumed the markets. With the pending Fed meeting on September 17th, it is largely expected that a consecutive rate cut will follow. A continuation of rate cuts would indicate that the Fed believes the US economy is contracting, and thus we are more likely to be closer to the looming recession.
According to Economist John Mauldin, “Lower asset prices aren’t the result of a recession. They cause the recession. That’s because access to credit drives consumer spending and business investment. Take it away and they decline. Recession follows. The last credit crisis came from subprime mortgages. Those are getting problematic again. But I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds.”
Economists such as Mauldin are pointing to the high levels of corporate debt as the cause of the next recession, or in other words, the “bubble”. Bubbles occur when the market prices an asset above it’s true value. For investors seeking yield but wanting to avoid the risk of investing in corporate debt, real estate investments are a suitable option.
Real estate investments, particularly multifamily, are often recession-proof investments. Multifamily real estate is recession-proof because during down markets renters have largely proven to maintain their rents. Such housing doesn’t carry the risk of other classes such as single family. The charts below show the percentage change in the prior year for rental and for sale houses from 2008 to 2018. As illustrated below, during the recession of 2008, rental vacancies dropped less than 1% in the following year while housing vacancies decreased by 10%.
The Fed’s next meeting may indicate how quickly the looming recession could occur, but sophisticated investors will position themselves to be prepared in advance.
Less than two weeks ago, the U.S. Federal Reserve announced its first rate cut since 2008. This decision surprised few given the uncertainty in the economy and global trade tensions. What did perhaps surprise many was the effect that the Fed’s decision had on the bond markets. Since the Fed’s announcement on July 31, the 10-year treasury yield has dropped from 2.02 to 1.73. But what does this mean for investors’ portfolios?
According to Economist John Mauldin, “the longer an inverted yield curve persists and the deeper it gets, the higher the probability of recession within the next 9–15 months.” Mauldin predicts a flight of capital toward high-yield junk bonds. Such assets may be able to provide yield, but at what cost?
The safest yield-producing investment during such tumultuous times is multifamily real estate. We have been specializing in multifamily real estate for 40 years because during down markets, it is the most resilient asset class (see Figure 1 below from CBRE Research).
We are already witnessing some of the most high profile investment firms, such as Iconiq Capital, buying up apartment buildings throughout major US cities (Source: WSJ). The timing of these investments demonstrates where the smart money is headed to prepare for our next economic cycle, and that is multifamily real estate.
It’s no secret that real estate has been, is, and will continue to be a popular choice of investment. As individuals take a more holistic approach to their portfolio planning, real estate investments are receiving a bigger piece of the pie to add diversification and cash flow.
That said, it still came as a surprise to many (but not us), when a nationwide Bankrate survey revealed this month that real estate is Americans’ favorite long-term investment. With rate cuts and swinging volatility, too much uncertainty lies in traditional markets. Real estate investments may offer stability, cash flow, and the gratification of owning a tangible asset that when properly managed over the long term, can bring about capital appreciation.
As investors shape their portfolio with a long-term approach, real estate investment becomes the necessary choice to offer value that is becoming more difficult to find elsewhere.