How does Class B multifamily fare during a recession?

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How does Class B multifamily fare during a recession?

As we enter a period of economic uncertainty, many investors are wondering how different asset classes will fare during a potential recession. In this post, we’ll take a look at Class B multifamily properties and explore how they have performed during past downturns. While no one can predict the future with certainty, understanding historical trends can give us some valuable insights into what we might expect in the months ahead.

Class B multifamily properties are those that are middle-of-the-market, in terms of both quality and price.

Class B multifamily properties may provide investors with an opportunity for both financial returns and diversification of risk beyond traditional public equity and bond markets. This asset type strikes a balance in terms of both quality and price, allowing investors to secure risk-adjusted returns without having to compete in the higher end of the market. Investors should carefully consider how these lower-priced units fit into their overall personal investment strategy, as they can have the potential to boost overall returns due to the possibility of increasing occupancy rates. With tenancies tending to remain more stable than other properties, Class B multifamily properties can be an attractive option for some investors in today’s real estate market.1

Class B multifamily properties may be less risky than Class C multifamily properties.

Class B multifamily properties have often been renovated or repositioned within the past decade, making them a distinct alternative to their Class C counterparts, which may not have been renovated since its original construction. Typically, when a property is renovated, most deferred maintenance is addressed. Minimizing the amount of deferred maintenance to be completed during the execution of the business plan allows the investment manager to focus on driving Net Operating Income (NOI). Compared to Class B properties, those in the Class C category typically require much more extensive renovation work and often have deferred maintenance items which may include: leaking roofs, antiquated electrical wiring, corroded pipes, and worn parking lots. In order to start increasing NOI through rent increases and unit turnover, these renovations must be completed before any other efforts can be made. While both classes have the potential to create value for investment mangers and investors alike, there may be less risk involved in owning and operating Class B assets. Increased construction requirements in Class C assets (due to deferred maintenance) can lead to increased construction risks, and therefore the business plan of a Class C property may not proceed as anticipated.

Any investment in real estate involves significant risks including but not limited to construction risk, natural disasters, leasing risk, and risks associated with changing macro-economic conditions. Class B multifamily has potential to mitigate these risks by requiring less construction than Class C while maintaining the possibility of adding value through updates, but investing in this Class of real estate can still be a risky endeavor. It often involves making improvements to an aging property, which can mean a larger initial investment as well as additional ongoing expenses. Financing can also be hard to come by, depending on the state of the market. Additionally, managing tenants or finding good renters can be difficult and there is always the risk of vacancies creating cash flow issues. Investors should also be aware that tenants in Class B complexes tend to be less reliable than tenants in class A buildings and therefore default on their rent more often. All in all, there are risks associated with investing in Class B multifamily properties, but with proper research and planning those risks can be managed and may even lead to a profitable investment.

During a recession, demand for Class B multifamily units tends to be more stable than for other types of housing.1

During an economic recession, Class B multifamily units tend to be a more reliable housing option for investors and renters alike. Because the rents for these units are typically lower than Class A properties, they’re often more affordable during times of financial hardship. Since demand from lower-income rental households is projected to hold steady or even increase over time, investors who own Class B units have potential to continue filling vacancies and generating profit, even in more difficult macroeconomic conditions. This is in stark contrast to luxury units which often suffer a decrease in occupancy during recessionary periods due to higher tenant turnover rates and fewer prospective renters who can afford such luxuries when money is tight. Thus, investing in Class B multifamily properties may provide relative stability during economic downturns, as compared to Class A properties.

Because they are more affordable than luxury units, renters may choose to downgrade to a Class B property during tough economic times.

In trying times, it can be an effective cost saving measure to downgrade rental arrangements. Renting a Class B property is often much more affordable than renting a luxury unit in the same area. While the amenities and features may not be as glamorous or as new, they may fulfill renters’ needs while still maintaining the peace of mind that comes with living in an apartment complex that offers community, security and convenience. Savvy renters looking to live within their budget may seek out reputable Class B properties.

Class B buildings also tend to have lower vacancy rates than other types of multifamily housing.1

Class B buildings may be a good investment during a recession since they typically maintain lower vacancy rates compared to other types of multifamily housing. These kinds of buildings produce stable results, which makes them ideal for investors who are looking for steadier revenue during uncertain economic times. Plus, a low vacancy rate means investors may be able to secure more rental revenue in the short and long term. Since other asset classes are more likely to run into trouble during a recession than Class B multifamily, these investments may mitigate losses and could potentially maintain steady cash flows for investors.

In conclusion, Class B multifamily properties may be an attractive investment for some investors during a recession because of their affordability and stable demand. These buildings tend to have lower vacancy rates than other types of housing, making them a more reliable source of income for investors. If you’re considering investing in multifamily property, be sure to do your research and consult with an experienced investment manager to find the right opportunity for you.

Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include, but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.

1Why Class B Multifamily Is Recession-Resilient, February 4, 2021 https://www.m ultihousingnews.com/why-class-b-multifamily-is-recession-resilient/

About Fairway America

Fairway America is a leading alternative investments manager focused on middle market commercial real estate. Established in 1992, the company specialize in real estate credit and private equity strategies on behalf of individual and institutional investors. As of Q1 2022, the firm manages more than $315 million of investor capital and a portfolio of assets representing more than $2.2 billion in gross asset value across several major property types. For additional information, visit www.fairwayamerica.com.

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