With two consecutive quarters of GDP decline, alongside high inflation, many real estate investors are questioning how to approach the market during these unique times and a potential recession. Or are we in one already? There is a lot of debate around whether we are or not due to the strong labor market. Although market dynamics may play out differently, a good way to judge how any investment may perform during certain conditions is to look at past performance during similar situations. While not impervious to the effects of a recession, multifamily investing offers unmatched advantages to weathering uncertain economic times.

How are Multifamily, Office, Industrial, and Retail Different During a Recession?

There have been five different periods of recession during the last 40 years, from the energy crisis in 1980 to the Great Recession. In 2019, CBRE Economic Advisors evaluated the performance of apartments against office, industrial, and retail during the contractions in 2001 and 2008-2009. According to CBRE’s report, during these periods, apartment rents were much more resilient than rents for the other types of properties and post-recession growth far outpaced them as well.

During the 2001 recession, rents for both office and industrial fared worse than multifamily rents with deeper declines occurring for even longer periods of time. Office rent decline was three times as much as multifamily and took 1.5 times longer to begin its recovery. Then, while rents for multifamily returned to their pre-recession peak in just seven quarters, it took twice as long for office rents to do the same. Although the decline of industrial rents was not as deep as office, they declined over a longer period of time, almost four years. It then took two more years for industrial rents to reach their prior peak.

Multifamily sector’s faster recovery allowed for investors to enjoy longer and greater growth until the Great Recession began in 2008. During this recession, compared to office, industrial and retail, multifamily again experienced the lowest level of rent decline and shortest period until rents reached their prior peaks. This time, rents in industrial and office declined more than two times that of multifamily. Retail rent decline was not as deep but it was close to two times that of multifamily. The recovery was also quicker for multifamily, taking seven quarters to hit its prior peak, compared to 13 quarters for industrial and nine quarters for office. Retail, which has been challenged by the emergence of e-commerce, has yet to reach its prior peak.

The Stability of Multifamily

While the downturns of 2001 and 2008-2009 impacted the overall real estate sector, multifamily was more resilient, in terms of both rental rates and recovery. Furthermore, data demonstrates the long-term stability of investing in multifamily. In 2018, the National Multifamily Housing Council published a white paper, Explaining the Puzzle of High Apartment Returns, that finds multifamily to have provided better risk-adjusted return than any other real estate asset class when you look at a period over one year, as you can see is the tables below.

The Performance of Commercial Real Estate Against the Stock Market

The National Council of Real Estate Investment Fiduciaries (NCREIF) tracks the performance of commercial real estate as the NCREIF Property Index (NPI). NPI is an unleveraged composite total return for private commercial real estate properties held for investment purposes only. Its large pool of properties consists of operating apartment, hotel, industrial, office, and retail. As seen in the table below and as reported by NCREIF in 2019, commercial real estate outperformed the S&P 500 in the 20-year period that includes the recessions of 2001 and 2008-2009. And its performance has been far more stable without the volatility that comes with the stock market.

Is Multifamily Investing Recession-Proof?

As with any investment, the multifamily sphere is not impervious to market stresses. However, a well-selected asset in a thriving and well-selected location will perform much better than other investments. In addition, during inflationary times, multifamily has a reliable track record as a good inflation hedge (read more in this article we’ve written). In these challenging times, which is markedly different from any time period we’ve seen before, there’s optimism that the fundamentals of rigorously underwritten multifamily assets can continue to endure as they have in the past. Multifamily real estate’s unique position as an investment in the basic need for shelter separates it from other property classes. Most people will forgo many other expenses in harder financial times before surrendering a safe place to live. No other asset class can compare.

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