Nirav Shah
Wealth of Geeks
Americans are apprehensive about the last quarter of 2023, 68% of them fearing a recession is on the rise.
According to a survey conducted by Nationwide Mutual Insurance Company, 80% of the respondents feel if we see a recession, it will be severe. About 62% of those surveyed believe a recession could be worse than the Great Recession that shook the economy in 2007-2009. If these forecasts materialize, there are challenging times ahead for ordinary people in the United States.
Although manufacturing and industrial production have been weak this year, employment and income growth have retained their strength, plus short-term yields have been exceeding long-term yields on Treasury bonds. Some experts believe this is a clear indication of a recession on the horizon. The good news, however, is that even if a downturn does come, some traditionally stable investment assets are likely to remain strong.
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Real estate holds value during market downturns
The history of American real estate suggests that, compared to other assets, this sector has done relatively better in holding its value. The availability of land for construction and the supply of existing properties will likely decrease during a recession.
Moreover, studies suggest the value of certain classes of real estate properties will outpace the impact of an inflationary market environment. For doctors and other working professionals, investing in real estate has gained momentum.
It’s true the rise in interest rates has depressed the short-term value of real estate and caused severe financial stress for real estate owners and operators. However, this also allows savvy operators to benefit from these short-term value declines by acquiring quality assets on lucrative terms. Moreover, the Federal Reserve will likely reduce short-to-medium-term interest rates soon.
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Real estate investment in a market downturn
Many experts feel that asset classes such as multifamily, medical office buildings, self-storage, and last-mile industrial will be particularly suitable for investment during a recession. High mortgage rates and the unaffordability of single-family housing have increased the demand for multifamily housing rentals.
As patients return to in-person visits after the pandemic, medical offices across the United States are experiencing high occupancy. Low capital expenditure and counter-cyclical demand may continue to benefit self-storage. Finally, with an increased focus on e-commerce and improved supply chain logistics, a comeback is undoubtedly in the cards for industrial real estate.
Making any investments during a recession sounds intimidating. There are some tax advantages that can make real estate an advantageous investment option, even during inflation.
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Continued demand for housing
The greatest strength of real estate is that people will always need places to live. A recession may lead to reduced spending, but housing is not an expense that individuals cut out of their monthly budget. Therefore, the decline in rental income may be less than stock prices.
Real estate is not 100% recession-proof but it is generally more resilient than other assets.
While the economy’s overall condition impacts real estate, the need for houses often supersedes these factors.
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Creation of cash flow
Cash flow generation is another reason real estate investment can make a difference during a recession. Unlike other assets that pay out only when sold or retired, real estate property can provide rental income. This cash flow can offer some liquidity when the market is down.
Recessions rarely result in decreased rental prices. On the contrary, they may increase in some instances, such as inflation. COVID-19 accelerated rent, and while some markets like Miami have a rental pull-back, they are still ahead of historical trends.
People hesitate to make big purchases in challenging economic times, and residents are more likely to keep renting. Liquidity is significant during a market downturn because most people need to adjust elsewhere. As other investments falter, the extra income generated from real estate can provide a much-needed safety cushion.
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Attractive return
Since 1980, the American economy has encountered five recessions. In four of those, the average year-over-year fall in home prices was 5%.
If the same historical pattern repeats, purchasing a house could become significantly cheaper and a good investment when the market recovers. When interest rates drop in 2025 and beyond, real estate purchased now will be poised to succeed.
Many viable investment opportunities in real estate can provide some respite during an economic downturn. Real estate crowdfunding has recently brought real estate investment within the reach of ordinary investors. A form of peer-to-peer lending involves collecting funds from a large number of people to invest in large projects that are often beyond what an individual could manage. Investors buy property shares proportional to the amount invested. Income from real estate crowdfunding can be distributed through a single specified payment or recurring income distributions.
Investing in real estate crowdfunding does offer significant protection against recessions. Before making this kind of investment decision during a downturn, there are many factors to consider: cash flow, diversification, risk and yield, and identification of recession-resistant locations and assets.
The growing popularity of crowdfunding in real estate has resulted in the emergence of many investment platforms. The CrowdStreet investment platform has gained traction by offering various real estate investment opportunities. This platform provides investments in offices, hospitality, industrial, retail, senior housing, multifamily, medical offices, storage, and many more classes. The platform has funded over $2.4 billion in 500 projects, with more than $21 billion in total capitalization.
Fundrise is another popular platform among individuals looking for passive real estate investment opportunities. Unlike similar platforms, Fundrise is open to non-accredited investors. Investors can start on that platform with an investment of as little as $10. Investors can also invest in a real estate investment trust (eREIT) rather than individual projects — funds invested in many projects with various risk and return profiles. The platform issues monthly distributions, and investors can accept the cash or reinvest.
Finally, it’s worth remembering that while a recession is upsetting, a suitable investment can make a difference in a person’s assets. While investing in real estate doesn’t guarantee success, this option is more reliable than other asset classes. As the fear of another recession looms, investors should review their financial standing carefully and consider relatively safer options.
