If you’ve been tracking current events, you’ll most likely have heard whispers of another recession. No doubt that triggers those of us in the commercial real estate industry as we travel back in our minds to the Great Recession of 2007. 

As we are all aware, every single sector of the economy was hit hard, particularly the residential housing industry. However, multi-family didn’t escape unscathed. Apartment owners dealt with foreclosures and tighter lending regulations. Developers were at the mercy of fluctuating interest rates. In an industry where project timelines can also fluctuate, many developers were hit with higher interest rates if the project ran over the predicted completion time.

However, demand did grow as homeowners were forced out of their homes and apartments were the best, and sometimes only, option for housing. This actually led to a huge boost to the multifamily sector, which saw a $50 billion increase in apartment investments between 2007 and 2017. A focus on downtown living and more amenities which are appealing to the up and coming Millenial and Gen Z populations added fuel to this fire.

Now, the market is strong, and apartment absorption is at its highest levels in 3 years. But, it is critical to make plans for the future so that when the next recession hits, albeit most likely a much smaller one, apartment owners don’t find themselves in the same situation as in 2007. Here are some tips for weathering the next economic downturn.

Have a Financial Plan in Place

If one of the major contributing factors to the impact on the multifamily housing sector was fluctuating interest rates and the lack of funds to complete projects, especially if they took longer than expected, then it only makes sense to have money in reserves. Apartment owners should look at their break even point and have a solid understanding of what the lowest vacancy rate they can afford is and make sure they have enough cash in reserves to weather a downturn.

Right now is the optimal time to look at financing. If a loan is coming due in 2 years, then now is the prime time to refinance and lock down long-term financing for 15-20 years. 

Another way to prepare would be to take advantage of this peak selling time. An option would be to sell a high maintenance property and 1031 Exchange into a different property with fewer management responsibilities, consistent cash flow and less exposure to the downturn.

Know Your Location and Demographics

Even when times are good, it’s critical to know your market. Making wise decisions as far as where to invest/buy ensure the longevity of your investments and not only will help you be profitable in a strong economy, but will also help you weather an economic storm.

While the definition of a prime apartment site may differ from location to location, there are some standards that apply across the board. The most profitable apartment sites are typically in urban/suburban areas that are close in proximity to public transport or a major road or highway. Most renters also want to be near retail locations and employment opportunities.

In addition to location, renters nowadays are very concerned with their lifestyle. Amenities are now not just a “nice to have,” but are a “must-have”. Fitness centers, common areas, bike storage and more are incredibly appealing, especially to the aforementioned Millenial and Gen Z populations.

The abundance of technology and data can help investors not only identify markets where the multi-family sector is strong, but it can also offer insights into the efficiency of a particular property, making it easier to run a cost analysis. Data has gotten so granular that it’s even possible to get a sense of the psychographics of a target group of renters.

Take Advantage of Affordability

Looking around Portland, it’s clear that there is a huge void in the affordable housing sector. Most investors are looking at opportunities to cash in on luxury apartment developments. However, the opportunities for sound investments in lower-income communities are abundant, especially when strategically combined with efforts to strengthen these populations through health, social services, educational and recreational programs. Also, investing in affordable housing doesn’t necessarily require breaking ground on a new development. Investors can purchase existing properties at a lower price and add upgrades and amenities.

Although the next recession isn’t predicted to hit as hard as the Great Recession, it is still wise to plan and have a secure foundation in place when it does come. Not only will this help preserve your own investments, but it will also help the entire multi-family housing sector weather the storm with the fewest scars possible.

Do you have additional tips for preparing for a recession? If so, comment below!