The Recession: What It Is and What It's Not

Daily discussion over the state of the U.S. economy and whether or not we have entered into a recession has been a focal point for the media. A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally by a fall in GDP for two consecutive quarters. The U.S. GDP growth rate has in fact been negative for two quarters, which was when the Federal Reserve increased its rates initially to slow down runaway inflation, with the most recent increase on September 23rd, when the federal funds rate increased by 75 basis points and indicated another hike should be expected in November.  This was the 5th increase in a 6 month period, and you'd have to go back to 1981 to find a six-month period when interest rates rose more.  Additionally, the average US stock mutual fund is down over 17% in 2022 and new home sales have fallen by nearly 30%. 

All leading indicators suggest that we are in fact in a recession and while this is a cause for concern, not all is lost. Generally speaking, it takes roughly 6 months for the changes to the federal fund rate to manifest in the economy, so the full effect of these increases has not yet been fully realized.

This is why leading White House officials and others say it's too early to declare a recession. First, it generally takes 6-9 months to assess if we are in a recession, so it's a bit early to make a solid declaration. Secondly, the GDP growth rate, while negative, is overall nominal. It is difficult to make such an assertion with a nominal decline; this could improve in the third quarter and a recession would not be declared. Optimistically speaking, there are several positive economic indicators that are antithetical to a recession, including wage growth near 7% and an unemployment rate of 3.5%.  It will be important to watch how these metrics trend over the next several months.  

What does this mean for Multifamily Investing?

Regardless of the current economic situation, both macro and micro, our investment strategies adjust for risk through conservative underwriting.  Additionally, with a long history of being a recession-resistant asset class, commercial real estate multifamily investments tend to thrive in both good times and bad which is why we prefer this over other options such as Hospitality, Office, or Retail. 

One key issue today is record inflation and how this impacts every aspect of the economy. Even with 7% wage growth, people today are still forced to spend less due to 9% inflation forcing many to reduce living expenses and invest less. Inflation rates combined with higher borrowing rates are making it more difficult for many to buy homes. Demand for rental units is expected to continue, driving up rents for the foreseeable future, and helping to protect multifamily investors against inflation.

During times of inflation and declining stock values, investing in fixed and cash-flowing assets mitigates risk. Interest rate hikes are expected to eat away at some profits, but investments in multifamily opportunities are likely to be a better option than most. Interest rates are unlikely to return to pre-covid rates, so investors must adjust expectations and factor this into any investment strategy going forward.

Schedule a call with us today to learn more about the benefits of passive investing and how you can hedge against inflation.