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.

Increased Delinquencies

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.

Contact us today to speak with an expert!

We sent the Thirty Capital Performance Group team to Miami to attend the 2nd Annual IMN Middle-Market Multifamily Forum Florida. During the conference, Webster Hughes spoke as a panelist for the session on Acquisitions: Creating Alpha & Building Your Portfolio While Keeping Risks at an Acceptable Level.

Our team is always excited to meet industry peers, reconnect with clients face-to-face, and gain new industry knowledge. And at this year’s conference, we were able to do that and more. We asked Webster to share his three key takeaways from the panel. Read below!

Key Takeaway #1: Expenses Are Outpacing Revenue.

Over the past three years, expenses have grown faster than revenue. As we move into an inflationary environment, it is no longer safe to assume a constant percentage concerning expense growth. As expenses outgrow revenue, effective operations and expense management will be critical for keeping up for the market and identifying opportunities to cut operational costs.

Key Takeaway #2: Cap Rate Adjustments Are Necessary as Interest Rates Rise.

An interest rate cap is a limit on how high an interest rate can rise on variable rate debt. A higher cap rate means that the market judges the property to have more risk, which means that investors need to earn a higher rate of return. For investors, an interest rate cap guarantees investment risks are at a minimum, even in a fluctuating market.

Key Takeaway #3: A Solid Debt Management Strategy is Critical In CRE Today.

Today, there is over $5 trillion in commercial real estate (CRE) debt – and the total debt is rising. As CRE firms and the industry as a whole take on more debt, minimizing risks and maximizing returns in your portfolio will require accurate, proactive debt management.

As interest rates and cap rates increase, the value of assets decrease. When asset valuations decrease, loan amounts decrease and eventually impact loans as they come to maturity. You need to understand your income, expenses, and debt. If you can understand all three of these, you’ll have a good handle on debt management and will be prepared when asset values come down.

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.

Contact us today to speak with an expert!