Fears of a recession looming in 2023 have been the talk for months now. According to a report released in late 2022 by the World Economic Forum, 70% of economists considered a global recession at least somewhat likely. The stock market has been down and interest rates are relatively high as the Federal Reserve works to tame the highest inflation rates seen since the early 1980s. On the upside, jobs numbers from the first part of the year have been better than anticipated. Employment trended higher in government, health care, social services and residential and commercial construction, prompting some analysts to push back their recession forecast.
What Makes Multifamily Properties a Safe Bet
If the U.S. economy does slide into a recession, multifamily real estate is a really great place to have your money invested. Let’s take a look at a few reasons why.
They’re Excellent Inflation Hedges
Though it’s a common belief that inflation endangers the value of real estate, the owners of multifamily property often experience more demand for apartments and increased rental growth as people increase spending on goods and services. A portfolio that contains multifamily assets ultimately gives you peace of mind. When prices are going up, you can simply raise your rents to offset inflation and various market dynamics.
Housing Is in Demand, Even in a Recession
As reiterated again and again by national housing industry organizations in recent years, a persistent low inventory of housing means there is not nearly enough supply to meet demand. According to a study conducted by the National Multifamily Housing Council and the National Apartment Association, the U.S. needs 4.3 million new apartments constructed by 2035. And even if the economy takes a nose-dive, this fact will remain unchanged. Owning a share of sought-after housing inventory makes good business sense simply due to the short supply.
Of course, there are some exceptions to this rule. If you own a portfolio of multifamily properties with rents set too high for the Cheyenne market, you will still face trouble. But owners of traditional market-rate apartments, fourplexes and other multifamily rentals can be confident of good returns.
Renting Is on the Rise
While 82% of households in Laramie County own their own homes, renting has become increasingly popular. This is especially true for people under the age of 35. Owning a home comes with commitment and a fair share of extra expenses in the form of repairs and upkeep, so many prefer to rent instead of buy. In addition, many millennials want the flexibility of being able to move from city to city for career opportunities. And in today’s market, with interest rates hovering around 7% as of late, some young adults are simply priced out of buying a house.
More Attractive Financing Options for Commercial Construction
On the financing side, interest rates track lower for multifamily properties than almost any other type of commercial real estate. For all the reasons mentioned above, lenders know that multifamily loans involve less risk. And you can choose from numerous competitive loan options that reduce risk for lenders and provide better terms for you, the borrower.
Major Tax Advantages
Investing in multifamily comes with its fair share of tax breaks — a major bonus during a recession. Under the existing tax code, real estate investors can offset the cash flow generated by an investment property through an annual tax deduction known as depreciation, thus lowering their taxes owed. And passive income and capital gains tax rates are generally lower than the federal income tax rates, so the tax obligation on a multifamily property will be much lower. In addition, a 1031-exchange allows real estate investors to defer the payment of capital gains taxes.
Interested in a Commercial Construction Project?
While there are no guarantees, multifamily investment clearly has a leg up on most other types of real estate investment during a recession. If you have money to invest in the real estate market, Gateway Construction, LLC specializes in commercial construction in Cheyenne and surrounding areas and would be honored to serve as your commercial builder of choice. Contact us to discuss your project by calling (307) 632-8950 or contacting us online. Let’s start building your future today!