Directional sign in the middle of nowhere.
We always take a conservative approach when it comes to investing in multifamily real estate. It’s times of economic uncertainty like these that really highlight how important preparation can be.
While we can’t prepare for everything, we can be watchful of the world around us. Let’s dig into some details about the economic uncertainty we’re facing and how that may affect multifamily investing.
I’ve had several folks ask me about my perspective on the current economic situation and the increasing uncertainty in the market. Statistically speaking we’re continuing to see inflation across the board. The CPI rose 7.9% year-over-year and was being driven by just about every sector in the economy. Employment remains very tight with folks continuing to sit on the sidelines while businesses expand. Existing businesses are struggling to get supplies and labor – thus hurting the overall GDP growth. Much of this, in my opinion, is continuing to be driven by the $5T+ that was dumped into the economy by the Fed as an offset to the potential effects of COVID shutdowns. Nonetheless, even with all these struggles, we continue to see a fairly steady economy underneath it all.
The bad news is that this uncertainty is also beginning to weigh on consumer sentiment. While the Fed continues to talk about rate increases and inflation, I believe the situation is a little more nuanced. I expect that we will get 2-3 rate hikes, which are already priced into the market, then we will observe a situation where the economy is weakening. This will require a pause in the increases and a re-assessment of rate hikes. My thought is they will level off for a while and then within 12 months drop back down. I think we will continue to see growth and a moderate inflation rate but nothing too crazy.
I believe the combination of supply chain constraints already in place and the war in Ukraine straining our relationship with China will contribute to a big overhang when it comes to economic growth. So far credit markets have held up well. This is key to keeping the global economy working and is the main reason the Fed flooded the system with money. Liquidity is key for investors to have the confidence they need to continue investing.
On the domestic front, it appears that congress probably won’t have the ability to pass any major legislation. In some ways this is a positive as the level of uncertainty elsewhere would make any potential congressional action even more concerning. My thought is we stay the course for the remainder of the year as we navigate this uncertainty.
All that being said, the fundamentals of multifamily real estate investing remain the same. Increasing rents, limited new inventory, high cost of entry, and continued high demand. The key will continue to shift towards operations as those with a deep operational bench will have a competitive advantage.