The commercial real estate (CRE) market is in the midst of change and uncertainty due to an impending recession. Although recessions often emerge swiftly, they do not typically appear without first presenting warning signs that a potential downturn is on the horizon, such as shifts in consumer confidence, a decline in employment rates, and a plummeting stock market. For multifamily owners, being aware of these changes and taking the necessary precautions to prepare in the event of a recession can be a defining moment for their portfolios’ performance before, during, and after an economic downturn. In addition, it’s important to have a solid strategy in place to ensure that your properties continue to generate income and retain their value.
Read ahead to learn potential challenges you may face as the industry navigates downturn and strategies for mitigating risks and managing multifamily assets in this type of market.
Potential Challenges for Multifamily Assets During Economic Downturn
Managing multifamily assets during a recession can be particularly challenging, as economic downturns can have a significant impact on the real estate industry. Some challenges that may arise when managing multifamily assets during a recession include:
Decreased Multifamily Demand
Economic downturns can lead to a decrease in demand for rental properties, as people may choose to downsize or move in with family members to save money. This can lead to higher vacancy rates and lower rental income.
During a recession, some tenants may struggle to pay rent on time, leading to a higher number of delinquencies. This can put a strain on property cash flows, making it difficult to cover expenses and pay debts.
Higher Maintenance and Repair Costs
Maintenance and repair costs can be particularly challenging during a recession when property owners may have limited funds available. Without the necessary repairs, property values can decrease, leading to lower rental income and decreased demand.
Rising Operating Costs
As inflation rates rise, property owners may face increased operating costs for utilities, insurance, and other expenses. These additional costs can make it difficult to maintain profitability during a recession.
Difficulty Securing Financing
During a recession, lenders may be less willing to provide financing for real estate projects, making it more difficult for property owners to secure financing for renovations, repairs, or new developments.
5 Ways to Mitigate Multifamily Risks During Economic Downturn
Multifamily commercial real estate owners can overcome the challenges of a recession by implementing various strategies that help maintain the value of their assets, mitigate risks, and continue to generate income. Here are some ways multifamily CRE owners can overcome the challenges of a recession:
Connect with a CRE Service Provider
A third-party service provider, like Thirty Capital Performance Group, can assist you and your team with unbiased opinions, actionable market insights, benchmarks, and property and portfolio optimization reports. These offerings can be used to attain a competitive advantage and to help you determine how your properties are performing, identify potential areas for improvement, and develop strategies to mediate risks. Click here to learn about our services!
Focus on Tenant Retention
Tenant retention is a critical aspect of multifamily asset management during a recession. By offering incentives for tenants to stay, such as reduced rent, gift cards, or other incentives, owners can retain tenants and avoid costly vacancies. Flexibility when it comes to rent payment can also help to reduce tenant delinquency.
Implement a Proactive Maintenance Program
To maintain the value of the property, owners should implement a proactive maintenance program. This will help ensure that the property is well-maintained and in good condition, which can help to attract and retain tenants. In addition, it can help owners avoid costly repairs and replacements in the future.
Find Opportunities to Reduce Expenses
Reducing expenses is a vital part of managing multifamily assets during a recession. Owners should look for ways to cut costs, such as by negotiating with vendors, switching to energy-efficient appliances, and reviewing insurance policies to ensure they are getting the best value for their money. It can also be helpful to conduct a market analysis in order to collect and leverage insights related to operating costs, see how your properties compare to neighboring ones, and identify potential areas to reduce expenses.
Improve Marketing Efforts
To maintain occupancy rates, owners should improve their marketing efforts to attract new tenants. This may include upgrading amenities, promoting on social media, or improving the property’s curb appeal to make it more attractive to potential tenants.
About Thirty Capital Performance Group
Thirty Capital Performance Group is a real estate advisory company providing expertise at the intersection of capital markets, technology, data analytics, and data science to deliver results to clients. The multidisciplinary team solves the challenges faced by owners, operators, property managers, asset managers, and institutional investors in validating cashflow and economic assumptions, providing independent, unbiased insights and recommendations.